Accounting for Impairment Under ASC 415-70

Accounting Standards Codification (ASC) 360-10 provides the primary guidance under U.S. Generally Accepted Accounting Principles (GAAP) for the impairment of long-lived assets. Impairment is the condition that exists when an asset’s recorded carrying amount on the balance sheet is greater than its fair value. The purpose of this standard is to ensure that a company’s assets are not overstated on its financial statements by requiring write-downs when necessary. This framework applies whether an asset is intended to be held and used in operations or disposed of by sale.

Identifying When to Test for Impairment

A “long-lived asset” refers to tangible assets like property, plant, and equipment (PP&E) and certain identifiable intangible assets that have a finite life. Companies are not required to test these assets for impairment on a fixed schedule, such as annually. Instead, testing is performed only when “triggering events” occur, which are changes in circumstances that suggest an asset’s carrying amount may not be recoverable.

Identifying a triggering event requires judgment. Examples of such events include:

• A significant decrease in the market price of an asset.
• An adverse change in how an asset is being used or in its physical condition.
• A change in legal factors or the business climate that could negatively affect the asset’s value.
• A history of operating or cash flow losses associated with the asset.
• A forecast that demonstrates continuing losses.
• An accumulation of costs to acquire or construct an asset that are significantly higher than expected.

Once a triggering event is identified, the company must proceed with an impairment analysis. Assets are evaluated for impairment at the lowest level for which identifiable cash flows are available and largely independent of other assets. For example, a rental property’s asset group might include the land, building, and improvements.

Accounting for Impaired Assets Held and Used

When a triggering event occurs for a long-lived asset that a company intends to continue using, a two-step impairment test is applied. This test determines if an impairment has occurred and the amount of the loss to recognize.

The first step is the recoverability test, which compares the asset’s carrying amount (its original cost minus accumulated depreciation) to the sum of the undiscounted future cash flows expected from its use and eventual sale. If the total of these undiscounted cash flows is greater than the asset’s carrying amount, the asset is considered recoverable, and no impairment loss is recorded.

If the asset fails the recoverability test, the company must proceed to the second step to measure the impairment loss. The loss is calculated as the amount by which the asset’s carrying amount exceeds its fair value. Fair value is the price that would be received to sell the asset in an orderly transaction between market participants. For example, if a machine has a carrying amount of $500,000, undiscounted cash flows of $400,000, and a fair value of $350,000, the company recognizes an impairment loss of $150,000 ($500,000 – $350,000).

After an impairment loss is recognized, the adjusted carrying amount becomes the asset’s new cost basis, which is then depreciated over the asset’s remaining useful life. An impairment loss recorded for an asset held and used cannot be reversed in a future period, even if the asset’s fair value subsequently increases.

Accounting for Assets Held for Sale

The accounting treatment changes when a company decides to sell a long-lived asset. To classify an asset as “held for sale,” several criteria must be met:

• Management must commit to a plan to sell the asset.
• The asset must be available for immediate sale in its present condition.
• The company must have initiated an active program to find a buyer.
• The sale must be probable within one year.

Once an asset is classified as held for sale, it is reported on the balance sheet at the lower of its carrying amount or its fair value less any costs to sell. Costs to sell are the incremental direct costs to transact the sale, such as broker commissions. This means any expected loss on the sale is recognized immediately, while gains are not recognized until the sale is completed.

A consequence of this classification is that depreciation expense ceases once an asset is designated as held for sale. The asset is removed from the property, plant, and equipment category and presented separately on the balance sheet. The company must continue to evaluate the asset’s value, recognizing further losses if its value declines or reversing previously recognized losses if it increases, but only up to the cumulative loss previously recorded.

Financial Statement Presentation and Disclosure

An impairment loss for an asset held and used is reported as a component of income from continuing operations on the income statement. If the company presents a subtotal for income from operations, the impairment loss must be included. Assets and liabilities of a disposal group classified as held for sale must be presented separately on the balance sheet and not be offset.

In the notes to the financial statements, a company must disclose information about the impairment, including:

• A description of the impaired asset or asset group.
• The facts and circumstances that led to the loss.
• The amount of the impairment loss.
• The income statement line item where the loss is included.

Disclosures must also detail how the fair value of the impaired asset was determined, including the valuation techniques used, such as a market, income, or cost approach. If significant unobservable inputs were used in the valuation (a Level 3 fair value measurement), information about those inputs must also be provided.