Impairment Under US GAAP vs IFRS: The Two-Step Test, the Recoverable Amount, and Why Only One Framework Reverses

Take one machine, one set of cash flow forecasts and one discount rate, and run the impairment test under both frameworks. Under IAS 36 the machine is impaired by 150,000. Under ASC 360 it is not impaired at all. Nothing about the asset changed between the two answers; what changed is that the first step of the US test compares the carrying amount with undiscounted cash flows, and an asset whose undiscounted cash flows cover its book value passes, however far its discounted value has fallen.

That is the single most examined difference between the frameworks on this topic, and it is not the only one. US GAAP never reverses an impairment on an asset held for use; IFRS requires a reversal when the recoverable amount recovers. US GAAP tests goodwill at the reporting unit in one step against fair value; IFRS tests it at the cash-generating unit against recoverable amount. A candidate coming from IFRS has the harder adjustment, because the IFRS model is the more intuitive one and the US model has to be learned as a procedure.

The two models side by side

Question	ASC 360, long-lived assets held and used	IAS 36
When to test	When indicators suggest the carrying amount may not be recoverable	When indicators exist; annually for goodwill and indefinite-lived intangibles
Step one	Recoverability: carrying amount versus the sum of undiscounted cash flows	None; go straight to measurement
Measurement of the loss	Carrying amount less fair value	Carrying amount less recoverable amount, the higher of fair value less costs of disposal and value in use
Value in use	Not a concept	Discounted entity-specific cash flows
Level of testing	Asset group: the lowest level with identifiable cash flows largely independent of other assets	Cash-generating unit, defined the same way
Reversal	Prohibited for assets held and used	Required when the recoverable amount recovers, except for goodwill
New basis after the loss	The reduced carrying amount, depreciated over the remaining life	Same

The worked example

A machine has a carrying amount of 1,000,000. Management's forecast of the cash flows from using it and eventually selling it totals 1,050,000 undiscounted. Discounted at the entity's rate, those flows are worth 850,000, which is the IFRS value in use. The machine could be sold today for 800,000, less 20,000 of disposal costs.

ASC 360. Step one: 1,050,000 of undiscounted cash flows exceeds the carrying amount of 1,000,000. The asset is recoverable. No impairment, no second step, and the machine stays at 1,000,000.

IAS 36. Recoverable amount is the higher of fair value less costs of disposal, 780,000, and value in use, 850,000: 850,000. Carrying amount exceeds it by 150,000, which is the impairment loss.

Now lower the undiscounted forecast to 900,000 and keep everything else. ASC 360 step one fails, and step two measures the loss as carrying amount less fair value: 1,000,000 less 800,000, a loss of 200,000. IAS 36 still gives 150,000. On the same facts the US loss is now larger, because fair value, a market measure, is lower than the entity's own value in use. The two frameworks do not rank in one direction; they use different numbers.

Assets held for sale

An asset that management has committed to sell, is available for immediate sale, is being actively marketed at a reasonable price and is expected to sell within a year is reclassified as held for sale, under both ASC 360 and IFRS 5. From that point it is not depreciated, and it is measured at the lower of carrying amount and fair value less costs to sell. A write-down on reclassification is a loss; a later increase in fair value less costs to sell is a gain, but only up to the cumulative losses previously recognised. This is the one place US GAAP allows a recovery on a long-lived asset, and it exists because the asset is now measured on a sale basis rather than a use basis.

If the plan to sell is abandoned, the asset goes back to held and used at the lower of its carrying amount before reclassification, adjusted for the depreciation it would have taken, and its fair value at the date of the decision.

Goodwill

Goodwill is not tested with the other assets, because it has no cash flows of its own and no fair value of its own.

ASC 350. Goodwill is assigned to reporting units and tested at least annually, or between annual tests when an event makes it more likely than not that a unit's fair value is below its carrying amount. An entity may first assess qualitative factors and skip the quantitative test if it concludes impairment is not more likely than not. The quantitative test is now a single step: compare the fair value of the reporting unit with its carrying amount including goodwill, and recognise a loss for the excess of carrying amount over fair value, capped at the goodwill allocated to that unit. The old second step, which valued the unit's assets to imply a fair value of goodwill, was removed in 2017 and a question that describes it is describing superseded guidance. Goodwill impairment is never reversed. Private companies may elect to amortise goodwill over ten years instead and test only on a triggering event.

IAS 36. Goodwill is allocated to the cash-generating units, or groups of units, expected to benefit from the combination, and each is tested annually by comparing its carrying amount including goodwill with its recoverable amount. A loss is allocated first to goodwill and then to the other assets in the unit pro rata, without taking any asset below its own recoverable amount. Goodwill impairment is never reversed under IFRS either; the reversal rule applies to the other assets in the unit.

Indefinite-lived intangibles other than goodwill, a brand or a licence with no foreseeable limit, are tested annually under both frameworks by comparing carrying amount with fair value (US GAAP) or recoverable amount (IFRS), with no recoverability step.

Which section asks

FAR tests impairment of property, plant and equipment, finite-lived intangibles and held-for-sale assets. Goodwill impairment, along with business combinations, is a BAR topic in the 2026 Blueprint, and a question that opens with a reporting unit and an acquisition is a BAR question even when it looks like a FAR one. The BAR study guide sets out what moved and why.

Question pattern	What to do
Carrying amount, undiscounted cash flows, fair value given	Step one against undiscounted; if it fails, loss is carrying amount less fair value
Same facts, "under IFRS"	Recoverable amount is the higher of value in use and fair value less costs of disposal; no step one
Asset recovers in value the next year	US GAAP held and used: no entry. IFRS: reverse up to the depreciated carrying amount that would have existed
Asset reclassified as held for sale	Stop depreciating; lower of carrying amount and fair value less costs to sell
Reporting unit fair value below carrying amount	Loss equals the excess, capped at goodwill
Cash-generating unit impaired under IFRS	Goodwill first, then other assets pro rata
Where the loss is presented	Income from continuing operations, not extraordinary; disclose the facts, the amount and the method of determining fair value

The reversal rule, and why it exists

The FASB's reasoning for prohibiting reversals is that a write-down establishes a new cost basis, and writing an asset back up would recognise an unrealised holding gain that the historical cost model does not otherwise permit. The IASB's reasoning is the opposite: an impairment is an estimate, and when the estimate proves too pessimistic the correction belongs in profit or loss. Neither is wrong, and the exam does not ask which is better. It asks which framework the question is set in, and the answer to every reversal question follows from that single fact. Under IFRS the reversal is limited to the carrying amount the asset would have had, net of depreciation, if no impairment had ever been recognised.

A Saudi candidate has one more reason to know both. Saudi listed companies report under IFRS as endorsed by SOCPA, so an impairment in a Tadawul-listed group follows IAS 36, and a US-listed parent consolidating that group follows ASC 360; the same asset can carry two different values in two sets of statements, and the difference is a reconciling item in the group's reporting. How SOCPA endorses IFRS covers what the endorsement changes and what it does not.

Where to practise this

Impairment is a two-framework topic and it should be practised as one, with the same fact pattern run under both. Prepito's FAR course covers ASC 360 and held-for-sale assets, the BAR course covers goodwill and reporting units, and the SOCPA Financial Accounting course covers IAS 36 and cash-generating units, each with worked explanations. The other divergence written the same way is inventory.

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Sources: FASB Accounting Standards Codification, Topic 360, Property, Plant and Equipment, and Topic 350, Intangibles, Goodwill and Other, IFRS Foundation, IAS 36 Impairment of Assets, AICPA CPA Exam Blueprints. The worked example is illustrative; the standards are amended periodically, and the Blueprint's allocation of goodwill topics to BAR should be confirmed for your testing window.