Differences Between U.S. GAAP and IFRS in Accounting for Goodwill Impairment and Inventory: Tax Treatment Under the Internal Revenue Code

Headnote

This paper examines how to account for goodwill impairment and inventory under the Financial Accounting Standard Board's (FASB) U.S. Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), and the Internal Revenue Code (IRC). Although U.S. GAAP and IFRS accounting standards share some similarities, there are still some key fundamental differences between the two standards. This paper will also detail the treatment of these items by the IRC and how taxation may share some similarities and differences to its financial reporting counterpart.

INTRODUCTION

Over the past decade, accounting professionals from various fields have been working to attain a single set of global accounting standards that will help make business financial statement results uniform worldwide. While financial accounting for certain items are almost identical under both U.S. GAAP and IFRS, other accounting items receive very difference treatment under each standard. In addition to understanding the effects of convergence on financial statement results, accountants must also take the time to contemplate and understand the possible income tax implications that may result from convergence.

GOODWILL IMPAIRMENT

Goodwill Impairment under U.S. GAAP

FASB 141 requires the purchasing company in a business combination to recognize goodwill as of the acquisition date and is measured by the excess of the sum of consideration transferred and the fair value of any non-controlling interest over the fair value of the identifiable assets acquired. Fair value is measured as the amount at which an asset could "be bought or sold in a current transaction between willing parties" (FASB ASC 142, 2001). Goodwill must be tested for impairment at least annually at the same time every year. Goodwill is not amortized and is tested for impairment after being assigned to reporting units. FASB 142 defines a reporting unit as "an operating segment or one level below an operating segment." To be assigned to a reporting unit, an asset or liability must relate to the operations for that operating unit and it must be considered when determining the fair value of that unit. The method of determining whether goodwill is impaired under U.S. GAAP principles requires a two-step approach. A recoverability test is first performed at the reporting unit level to determine if the carrying amount of the reporting unit exceeds the reporting unit's...