J-GAAP: Impairment

In Japan, the BADC issued Accounting Standard for Impairment of Long-Lived Assets in August 2002. Japanese Standard and IAS 36 (1998), Impairment of Assets, both set forth procedures that require companies to take similar steps, including identification of impairment indicators, performing recognition tests, and measuring impairment losses.

The major difference can be found in recognition criteria. IAS 36 says that if the carrying amount of the asset in question exceeds the collectible amount (defined as the higher of value in use or net selling price), an impairment loss must be recognized. Japanese GAAP, which is rather similar to the U.S. GAAP regarding recognition criteria, states that if the carrying amount exceeds the undiscounted sum of future cash flows from continuous use and eventual disposal of the asset, an impairment loss must be recognized. Japanese GAAP is based on a belief that an impairment is an irreversible event and an impairment loss must be recognized only when such impairment has a high degree of certainty of existence, because estimates of future cash flows are highly subjective.

Another difference is related to restoration. IAS 36 requires recognition of a restoration of the asset that meets certain criteria for restoration. Japanese GAAP, like U.S. GAAP, prohibits any restoration.

In determining future cash flows, Japanese GAAP states that only cash flows based on plans for future events committed by the management must be incorporated into the estimation. IAS 36 prohibits that cash flows from future events, including future capital expenditures and future restructuring, should not be included in determination of recoverable amount.

Treatment of corporate assets is also different. IAS 36 requires that if an impairment loss is recognized in a cash generating unit, a proportionate portion of the carrying amount of corporate assets attributable to the units must be subject to recognition of an additional impairment loss for corporate assets. Japanese GAAP requires applying either the IAS 36 method or U.S. GAAP method. Under U.S. GAAP method, an entity is required to set forth a higher level grouping of assets, in which additional impairment may be recognized attributable to corporate assets.
This Standard will be fully effective for fiscal years ending on or after March 31, 2005. Earlier applications are allowed for fiscal years ending during March 31, 2003 to March 30, 2005.