Question 17.4: Asset Impairments and Restructuring Charges Two related topi......
Asset Impairments and Restructuring Charges
Two related topics that almost always require special consideration on the part of analysts are asset impairments and restructuring charges. Asset impairments are write-downs of assets required when circumstances indicate that the carrying amount of an asset is excessive compared with the expected future benefits.
The term “restructuring charge” is used under IFRS to indicate a sale or termination of a line of business, closure of business locations, changes in management structure, and/or a fundamental reorganization. All of these events could also give rise to the recognition of a liability (e.g., a commitment to make employee severance payments or to make a payment to settle a lease).
On 25 April 2013, Fuji Electric Co., Ltd, a Japanese company reporting under the GAAP of its home country, announced an impairment loss on land, buildings, structures, and leased assets employed in its “solar cell and module business” in the amount of ¥6.5 billion (Fuji Electric 2013). The entire loss was recorded in its 2012 fiscal year (ending 31 March). Assets and net income were reduced by ¥6.5 billion.
Elan Corporation, plc, a biotechnology company headquartered in Ireland, reported US$42.4 million in restructuring and other costs incurred during fiscal year 2012 related to its decision to close a research facility in San Francisco, with the loss of around 200 jobs, and to shift much of its operations back to Ireland because of changing business conditions. Some of these costs were associated with the obligation to make current and deferred employee severance payments (Leuty 2012).^7
Recognizing an impairment loss and restructuring charges in a single period, although consistent with most GAAP, is most likely to overstate:
A . prior periods’ net incomes.
B . current period’s net income.
C . future periods’ net incomes.
^7See also Elan Corporation, plc, Form 20-F, filed 12 February 2013.
A is correct. The impairment and the restructuring were likely the result of past activities and should be taken into account when evaluating past net incomes. The current period’s net income, unless the impairment or restructuring is expected to be repeated, is understated. Future period net income may be overstated if reversals occur, but such behavior is not likely. Charging the entire impairment loss and restructuring charge in the current period are examples of conservative accounting principles.