Analysis of Long-Term Assets

Financial Statement Analysis, LOS weight share 0.8 percent of the 365 Level I learning outcomes.

Financial Statement AnalysisAnalysis of Long-Term Assets

Under GAAP the same two numbers, undiscounted cash flow and fair value, do two completely different jobs in the same impairment test, and mixing up which number answers which question is the single most repeated wrong answer on this topic.

Before you watch

Answer these three first. Getting them wrong now is normal, and it helps the lesson stick. Reveal the answers when you're done, then read on.

1. Under IFRS, an asset has a carrying amount of $800,000. Its fair value less costs to sell is $650,000 and its value in use is $700,000. The impairment loss to recognize is closest to:

Answer: B. IFRS defines recoverable amount as the higher of fair value less costs to sell and value in use, here $700,000. Impairment loss equals carrying amount minus recoverable amount: $800,000 - $700,000 = $100,000.

2. Under US GAAP, an asset has a carrying amount of $1,200,000. Expected undiscounted future cash flows are $1,100,000 and fair value is $900,000. The impairment loss is closest to:

Answer: C. Under the two-step GAAP test, undiscounted cash flows below carrying amount ($1,100,000 < $1,200,000) only trigger the impairment; the loss itself is then measured as carrying amount minus fair value: $1,200,000 - $900,000 = $300,000.

3. Under IFRS, a company recognized a $200,000 impairment loss on equipment three years ago, and the equipment's recoverable amount has since recovered. The most accurate statement is:

Answer: C. IFRS permits impairment reversal for assets other than goodwill, but the reversal cannot lift the carrying amount above what it would have been, net of depreciation, had the original impairment never occurred; US GAAP allows no reversal at all for long-lived assets.

The lesson

Runtime 21 minutes 9 seconds, measured from the published video.

The reading

Five to ten minutes on this one unit: what the exam wants, the idea in plain words, then straight into the trap and the practice.

The exam wants you to compare how purchased, internally developed, and acquired intangible assets are reported, explain and evaluate how impairment and derecognition affect the financial statements and ratios, and analyze the disclosures a company makes about its property, plant and equipment. The impairment comparison between IFRS and US GAAP is the module's most heavily tested single contrast.

IFRS and US GAAP test a long-lived asset for impairment in structurally different ways, not merely with different numbers plugged into the same formula. IFRS runs one step: compare the asset's carrying amount directly to its recoverable amount, defined as the higher of fair value less costs to sell and value in use, the discounted cash flows the asset is expected to generate. Any shortfall is recognized immediately as the impairment loss. US GAAP runs two separate steps using two different numbers for two different jobs. Step one is a recoverability test using undiscounted expected cash flows, used purely to decide whether an impairment exists at all. Only if that test fails does step two measure the actual loss, and it measures it a completely different way: carrying amount minus fair value. Confusing which number belongs at which step, undiscounted cash flow for the trigger, fair value for the measurement, is the most common error this module produces.

The two standards also diverge sharply on reversal. Under IFRS, a later recovery in an asset's value can reverse a previously recognized impairment, capped at the carrying amount the asset would have shown had the original loss never been taken. Under US GAAP, an impairment loss on a long-lived asset is permanent. It is never reversed, no matter how much the asset's value later recovers. Goodwill impairment is never reversed under either standard, the one point where IFRS and GAAP agree completely.

Derecognizing an asset, removing it from the books when it is sold or otherwise disposed of, produces a gain or loss equal to the proceeds received minus the asset's carrying amount at that date. Because this gain or loss reflects a one-time disposal transaction rather than ongoing operations, it is separated out when assessing how sustainable a company's reported earnings actually are, the same treatment non-recurring items receive elsewhere on the income statement.

An impairment or an accelerated depreciation charge has a side effect worth watching for on its own. It mechanically shrinks the asset base a company reports. Because turnover and return-on-assets ratios divide by that same asset base, both ratios rise afterward even with no real change in operating performance. Reading that ratio improvement as a genuine operational gain, rather than the arithmetic result of a smaller denominator, is a common analytical mistake. The real comparability work on this topic happens in the footnotes: two companies holding economically similar equipment can report very different depreciation expense, and therefore different margins, purely from how each company's management chose its useful life or residual value assumptions.

The trap

A GAAP impairment question hands you both an undiscounted cash flow figure and a fair value figure in the same problem; using the undiscounted figure to measure the loss, or fair value to decide whether a loss is triggered at all, swaps the two steps' jobs and produces the wrong number even when every input is correct.

Learning outcomes covered by this module

Verbatim from the 2026 CFA Level I topic outline. Every practice question and key rule below is tagged to one of these where the stem and explanation make the match clear.

  1. compare the financial reporting of the following types of intangible assets: purchased, internally developed, and acquired in a business combination
  2. explain and evaluate how impairment and derecognition of property, plant, and equipment and intangible assets affect the financial statements and ratios
  3. analyze and interpret financial statement disclosures regarding property, plant, and equipment and intangible assets

Key rules

Written from this module's own lesson and the 2026 CFA Level I topic outline, in teaching order, each tagged to the learning outcome it belongs to where that is clear.

LOS 02

IFRS runs a one-step impairment test; US GAAP runs a two-step test with two different numbers doing two different jobs

IFRS compares carrying amount directly to recoverable amount, the higher of fair value less costs to sell and value in use, discounted, and recognizes any shortfall immediately as the impairment loss. US GAAP first tests recoverability using undiscounted expected cash flows purely as a trigger, and only if that test fails does it measure the loss, in a second step, as carrying amount minus fair value; the undiscounted figure is never used to size the loss itself.

LOS 02

IFRS allows impairment reversal on most assets; US GAAP allows none, and neither standard reverses goodwill

Under IFRS, a later recovery in an asset's recoverable amount can reverse a previously recognized impairment, capped at the carrying amount that would have existed absent the original loss; under US GAAP, an impairment loss on a long-lived asset is permanent and is never reversed regardless of later recovery. Goodwill impairment is never reversed under either standard.

LOS 02

Derecognizing an asset means comparing its carrying amount to what was actually received for it

When an asset is sold or otherwise disposed of, the difference between proceeds received and the asset's carrying amount at that date is recognized as a gain or loss; this gain or loss reflects only the disposal transaction and should be separated from operating results when assessing the sustainability of reported earnings, the same treatment given to other non-recurring items.

LOS 03

An impairment or a heavier depreciation charge shrinks the asset base, which mechanically lifts future asset turnover and ROA

Because turnover and return-on-assets ratios divide by average total assets, any write-down or accelerated depreciation that reduces the asset base raises these ratios in future periods even with no change in underlying operating performance; reading a post-impairment ratio improvement as a genuine operational gain, rather than an artifact of a smaller denominator, is a common analytical error.

LOS 03

Footnote disclosures on useful life and residual value assumptions are where the real comparability work happens

Two companies holding economically similar long-lived assets can report materially different depreciation expense, and therefore different margins, purely from management's choice of useful life or residual value; an analyst comparing peers must read the property, plant and equipment footnotes for these assumptions rather than taking reported depreciation expense at face value.

The trick

Authored only where a key rule has an arbitrary number, list, or formula shape worth a memory device; a module with none of those has no tricks here, on purpose.

IFRS: MAX of two figures. GAAP: two DIFFERENT figures for two DIFFERENT steps

IFRS recoverable amount takes the higher of fair value less costs to sell and value in use. GAAP never takes a maximum; it uses undiscounted cash flow only to trigger the test, then fair value only to size the loss.

IFRS reverses (except goodwill); GAAP never reverses

The single asymmetry most worth memorizing on this topic: a recovered asset value can be written back up under IFRS, capped at the no-impairment carrying amount, but never under US GAAP.

The method

Authored, ordered steps for answering this module's question types; a calculation module's calculator-dependent step ends with a bracketed BA II Plus keystroke sequence.

  1. Identify the accounting standard first, since IFRS and GAAP use structurally different impairment tests, not just different numbers.
  2. Under IFRS, compute recoverable amount as the higher of fair value less costs to sell and value in use, then subtract it from carrying amount for the loss.
  3. Under GAAP, first check whether undiscounted cash flows fall below carrying amount; if they do not, stop, there is no impairment. If they do, measure the loss as carrying amount minus fair value.
  4. For a reversal question, check the standard: IFRS permits reversal (capped, and never for goodwill); GAAP permits none.
  5. For a ratio-interpretation question following an impairment or accelerated depreciation, attribute any turnover or ROA improvement to the smaller asset base before crediting it to operating performance.

One card

Condensed from the key rules and tricks above, nothing new. What you'd want on one index card the night before.

Practice questions

Pick an answer, say how sure you are, then reveal. Every wrong choice gets its own explanation. 10 question(s) available for this unit.

Question 1Exam level

A company purchases equipment for $500,000 with a $50,000 residual value and a 10-year useful life. Under the double-declining balance method, the depreciation expense in Year 2 is closest to:

How sure are you?

Correct: A. The correct answer is $80,000. Year 1 DDB: 2/10 x $500,000 = $100,000. Book value end of Year 1 = $400,000. Year 2 DDB: 2/10 x $400,000 = $80,000. That is the SL method..
B. You might subtract residual before applying DDB in Year 1: 2/10 x ($500,000 - $50,000) = $90,000. DDB applies the rate to book value WITHOUT subtracting residual. Only SL subtracts salvage value first.
C. You might correctly gets Year 1 = $100,000 but incorrectly subtracts residual before Year 2 calc: 2/10 x ($400,000 - $40,000). Residual value is never subtracted in DDB calculations until book value approaches residual, at which point you switch to SL.

Unit: analysis-of-long-term-assets

Question 2Exam level

Company A uses straight-line depreciation. Company B, in the same industry, uses double-declining balance. In the early years of an asset's life, compared to Company A, Company B will most likely report:

How sure are you?

Correct: A. The correct answer is Lower net income and lower asset values. DDB front-loads depreciation expense, producing higher depreciation charges in early years vs SL. This reduces net income AND reduces book value of assets more rapidly..
B. You might confuse which method is more aggressive early on. DDB is more aggressive (higher expense) early, producing LOWER net income, not higher.
C. You might correctly identify lower net income but logic-error on assets. Higher depreciation reduces book value more, so DDB produces lower asset values, not higher.

Unit: analysis-of-long-term-assets

Question 3Exam level

Under IFRS, an asset has a carrying amount of $800,000. Its fair value less costs to sell is $650,000 and its value in use is $700,000. What impairment loss should be recognized? The value is closest to:

How sure are you?

Correct: A. The correct answer is $100,000. Under IFRS (IAS 36), recoverable amount = higher of (a) fair value less costs to sell ($650,000) and (b) value in use ($700,000). Recoverable amount = $700,000. Impairment loss = $800,000 - $700,000 = $100,000..
B. You might use fair value less costs to sell ($650,000) instead of the higher recoverable amount. IFRS requires using the HIGHER of the two amounts as recoverable amount. $700,000 > $650,000, so VIU is used.
C. You might confuse with GAAP Step 1 undiscounted cash flow test and believes no impairment triggers. This is IFRS. There is no undiscounted cash flow threshold test. Compare carrying amount directly to recoverable amount.

Unit: analysis-of-long-term-assets

Question 4Harder

Under US GAAP, an asset has a carrying amount of $1,200,000. Expected undiscounted future cash flows are $1,100,000. Fair value of the asset is $900,000. The impairment loss is closest to:

How sure are you?

Correct: A. The correct answer is $300,000. GAAP two-step test. Step 1: Is $1,100,000 (undiscounted CF) < $1,200,000 (carrying amount)? Yes. Impairment is indicated. Step 2: Impairment loss = carrying amount - fair value = $1,200,000 - $900,000 = $300,000..
B. You might calculate $1,200,000 - $1,100,000 = $100,000, using undiscounted CF as the measurement. Step 1 uses undiscounted CF only as a TRIGGER. The MEASUREMENT in Step 2 uses fair value, not undiscounted CF.
C. You might apply IFRS logic (recoverable amount = max of two figures) and gets confused. Under GAAP: Step 1 undiscounted CF < carrying amount means impairment IS required. Cannot skip to zero.

Unit: analysis-of-long-term-assets

Question 5Exam level

A company capitalizes a $5 million expenditure instead of expensing it. Compared to expensing, in the CURRENT year, capitalizing will most likely result in:

How sure are you?

Correct: A. The correct answer is Higher net income, higher total assets, and higher CFO. Capitalizing moves the $5M from an operating expense to an asset, so operating expenses fall, net income rises, total assets rise. The cash outflow is classified as CFI not CFO, so CFO is artificially higher..
B. You might know net income and assets go up but incorrectly think CFO falls because cash went out. Capitalization reclassifies the outflow to CFI. CFO is HIGHER under capitalization because the operating cash outflow has been removed from operations.
C. Random guess or confusion with contra-asset entries. Capitalizing adds an asset to the balance sheet. Total assets are unambiguously higher.

Unit: analysis-of-long-term-assets

Question 6Harder

Under IFRS, a company recognized an impairment loss of $200,000 on equipment three years ago. The equipment's fair value has since recovered. Which of the following is most likely correct?

How sure are you?

Correct: A. The correct answer is The impairment loss can be reversed, but only up to the amount that would have been the carrying amount if no impairment had occurred. Under IFRS, impairment losses on assets other than goodwill can be reversed if conditions change. The reversal is capped at what the carrying amount would have been (net of depreciation) had the impairment never been recognized..
B. You might know US GAAP prohibits reversal and incorrectly apply this to IFRS. This is the GAAP rule, not IFRS. IFRS allows reversal for assets other than goodwill.
C. You might know IFRS allows reversal but miss the cap. The reversal is capped. You cannot reverse more than what the asset's carrying amount would have been absent the impairment.

Unit: analysis-of-long-term-assets

Question 7Exam level

A company switches from double-declining balance to straight-line depreciation. This change is most likely described as a:

How sure are you?

Correct: A. The correct answer is Change in accounting estimate applied prospectively. In practice, under both IFRS and GAAP, changing the depreciation method is treated as a change in accounting estimate and applied prospectively. Prior periods are NOT restated..
B. You might know that policy changes require restatement and classify method changes as policy changes. Under IFRS (IAS 8) and GAAP (ASC 250), a change in depreciation method is a change in ESTIMATE, not policy. Applied prospectively.
C. If the prior method was 'wrong,' some candidates assume error correction. An error correction requires restatement, but changing methods voluntarily is an estimate change, not an error.

Unit: analysis-of-long-term-assets

Question 8Exam level

Which depreciation method results in the LOWEST total tax paid over the life of an asset, assuming a constant tax rate, most likely?

How sure are you?

Correct: A. The correct answer is All methods result in the same total tax paid over the asset's life. Total depreciation equals cost minus salvage value regardless of method. Total taxable income over the asset's life is unchanged. Only the TIMING of taxes differs, not the total amount..
B. You might confuse annual tax minimization with total lifetime tax. SL does not minimize lifetime taxes. It produces higher early taxes vs accelerated methods, then lower later taxes.
C. DDB does reduce taxes early via time value of money, but total tax is unchanged at constant rates. Total taxes paid (undiscounted) are identical. DDB defers taxes to later years. It does not eliminate them.

Unit: analysis-of-long-term-assets

Question 9Above the exam

A company tests a piece of equipment for impairment under US GAAP. The asset's carrying amount is $500,000, the sum of estimated future UNDISCOUNTED cash flows is $520,000, and the asset's fair value is $430,000. Combining the two-step US GAAP impairment test with these figures, the impairment loss to be recognized is most likely:

How sure are you?

Correct: B. US GAAP's impairment test is a two-step process. Step 1 (recoverability): compare carrying amount to the SUM OF UNDISCOUNTED future cash flows; impairment is only triggered (moving to Step 2, measurement) if carrying amount EXCEEDS that undiscounted sum. Here $500,000 (carrying) is LESS than $520,000 (undiscounted cash flows), so Step 1 is not triggered, no impairment loss is recognized at all, and the fair value figure in Step 2 is never even reached.
A. Comparing carrying amount directly to fair value skips the mandatory US GAAP Step 1 recoverability test entirely; under US GAAP (unlike the one-step IFRS approach), no impairment loss can be recognized at all unless Step 1 is first triggered, which it is not here.
C. $20,000 correctly computes the Step 1 comparison but misapplies its meaning: Step 1 is a TRIGGER test, not a measurement of the loss. Since undiscounted cash flows exceed carrying amount, the test is not triggered and no loss amount (from Step 1's own numbers or otherwise) should be recognized.

Unit: analysis-of-long-term-assets

Question 10Above the exam

A company operating under IFRS uses the revaluation model for a class of equipment. In Year 1, the equipment's fair value rises $40,000 above its carrying amount (recorded in OCI). In Year 2, the equipment's fair value falls $60,000 below its Year 1 revalued amount. Combining the IFRS revaluation model's treatment of gains and losses, the Year 2 decline is most likely recognized as:

How sure are you?

Correct: B. Under the IFRS revaluation model, a revaluation LOSS is first offset against any prior revaluation GAIN on the SAME asset recorded in OCI (reversing that OCI balance down to zero); only the EXCESS loss beyond the available OCI balance is recognized in profit or loss. Here the prior OCI gain was $40,000; the current $60,000 decline first reverses that $40,000 through OCI, and the remaining $20,000 flows through profit or loss.
A. Not the entire $60,000 loss can be absorbed by OCI; OCI can only absorb up to the amount of the PRIOR GAIN already recorded there for this same asset ($40,000). Beyond that, further declines must flow through profit or loss, not be parked in OCI indefinitely.
C. Revaluation losses are not always expensed in full; the model specifically allows a loss to first reverse any available prior gain sitting in OCI for that same asset before any excess is recognized in profit or loss, which is exactly the mechanism this question is testing.

Unit: analysis-of-long-term-assets

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