Impairment
Writing an asset down to what it can now recover. No cash moves, and it is management conceding that something will not deliver what was assumed.
Where you will meet it
Impairment appears in 10 learning outcomes on the CFA syllabus. A few of them:
- Explain how goodwill is accounted for and disclosed
“Goodwill is not amortised under IFRS or, for public companies, US GAAP; it is tested for impairment at least annually, at the cash-generating unit under IFRS and the reporting unit under US GAAP.”
- Work out FCFF and FCFE
“Non-cash charges include depreciation, amortisation and impairments, while gains on disposals are deducted.”
- Set IFRS against US GAAP on how each classifies, measures and discloses financial asset investments, associates, joint ventures and business combinations, as well as special purpose entities and variable interest entities
“Goodwill impairment is tested at the cash-generating unit under IFRS and the reporting unit under US GAAP.”
- Explain the role of FFO (funds from operations) and AFFO (adjusted FFO) in valuing REITs
“Funds from operations corrects this: FFO = net income + real estate depreciation and amortisation + losses on property sales − gains on property sales, with impairment write-downs added back.”
Practise it
Practise impairment until it is automatic: questions that explain every wrong option.
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