Impairment reversal is allowed under IFRS but not under US GAAP.

Impairment reversal is allowed under IFRS but not under US GAAP. This difference in treatment can be attributed to the differing accounting standards and regulations between the two frameworks.

Under IFRS, impairment reversal is permitted to a limited extent (Huang et al., 2018). This means that if an asset's value has been previously impaired, and the conditions that led to the impairment no longer exist, the impairment can be reversed (Huang et al., 2018). This allows companies to recognize gains on impairment reversal (Huang et al., 2018). The decision to reverse an impairment is based on objective evidence that the asset's recoverable amount has increased (Huang et al., 2018). The allowance for impairment reversal under IFRS is seen as a way to provide more timely and relevant information to users of financial statements (Huang et al., 2018).

On the other hand, US GAAP prohibits impairment reversal (Dudycz & Pra?ników, 2020). Once an impairment loss is recognized, it is considered permanent and cannot be reversed (Dudycz & Pra?ników, 2020). This approach is based on the principle of conservatism, which aims to ensure that assets are not overstated in financial statements (Penner et al., 2013). The rationale behind this prohibition is to prevent the manipulation of financial statements by companies seeking to improve their reported financial performance (Dudycz & Pra?ników, 2020).

The difference in treatment of impairment reversal between IFRS and US GAAP has implications for financial reporting and decision-making. The allowance for impairment reversal under IFRS can affect the value relevance of financial information (Lu & Fu, 2014). It has been found that the value relevance of impairment reversal information is negatively affected by regulatory-motivated earnings management (Lu & Fu, 2014). This suggests that companies may manipulate impairment reversal information to achieve certain reporting objectives (Lu & Fu, 2014).

In contrast, the prohibition of impairment reversal under US GAAP ensures that impairment losses are recognized and reflected in financial statements, providing a more conservative and reliable representation of a company's financial position (Penner et al., 2013). However, this approach may also limit the usefulness of financial information, as it does not allow for the recognition of gains on impairment reversal (Huang et al., 2018).

In summary, impairment reversal is allowed under IFRS but not under US GAAP. This difference in treatment reflects the different accounting standards and regulations governing the two frameworks. The allowance for impairment reversal under IFRS provides more timely and relevant information to users of financial statements, but it also raises concerns about the potential manipulation of financial information. The prohibition of impairment reversal under US GAAP ensures a more conservative and reliable representation of a company's financial position, but it may limit the usefulness of financial information.

References:

Dudycz, T. and Pra?ników, J. (2020). Does the mark-to-model fair value measure make assets impairment noisy?: a literature review. Sustainability, 12(4), 1504. https://doi.org/10.3390/su12041504

Huang, M., Ting, C., & Chen, Y. (2018). An empirical study on the relationship between accounting conservatism and asset impairment recognition: evidence from companies in taiwan. Management and Economics Review, 3(1), 58-76. https://doi.org/10.24818/mer/2018.06-05

Lu, H. and Fu, J. (2014). Structural changes in the chinese stock market: a review of empirical research. China Accounting and Finance Review, 16(2). https://doi.org/10.7603/s40570-014-0006-2

Penner, J., Kreuze, J., & Langsam, S. (2013). Long-lived asset impairments in the shipping industry and the impact on financial statement ratios: comparing u.s. gaap and ifrs standards. International Journal of Accounting and Financial Reporting, 3(2), 76. https://doi.org/10.5296/ijafr.v3i2.4226