ASC 360-10-35: Accounting for Asset Impairment

Accounting Standards Codification (ASC) 360-10-35 provides the authoritative guidance for how companies account for the impairment of long-lived assets. These assets, including property, plant, and equipment, are tangible items expected to generate economic benefits for more than one year and are held for use in operations.

The primary objective is to ensure a company’s balance sheet does not overstate asset values. The standard establishes a framework to prevent companies from carrying assets at a value greater than the future economic benefit they are expected to generate. This guidance mandates that companies evaluate their long-lived assets for potential write-downs when specific events suggest their value has declined, using a structured, two-step process to first test for and then measure the amount of any impairment.

Identifying When to Test for Impairment

The impairment test for long-lived assets under ASC 360-10 is not performed on a fixed schedule, but only when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These “triggering events” are signals that the asset’s value on the company’s books might be overstated.

These indicators can be external, originating from the broader business environment. Examples include a significant decrease in the asset’s market price, an adverse change in the legal or business climate like a new regulation, or a general economic downturn affecting the industry.

Internal indicators arise from the company’s own operations and decisions regarding the asset. Evidence of physical damage, a significant adverse change in how an asset is being used, or a history of operating or cash flow losses associated with the asset can all serve as triggers. The presence of any single indicator is sufficient to require the company to proceed with the formal impairment test.

The Impairment Test for Assets Held for Use

Once a triggering event has been identified, a company must perform a formal two-step impairment test to determine if a loss must be recognized. This process applies to individual assets or, more commonly, to an “asset group,” which is the lowest level for which identifiable cash flows are largely independent of other assets.

Step 1: The Recoverability Test

The first step is the recoverability test, which acts as a screening mechanism. This test compares the asset’s carrying amount—its original cost minus accumulated depreciation—to the sum of the undiscounted future net cash flows expected from its use and eventual disposal.

To perform this test, a company forecasts the net cash it will receive from operating the asset over its remaining useful life and any cash it expects from selling it at the end of that life. These cash flows are not adjusted for the time value of money. If this sum of undiscounted cash flows is greater than the asset’s carrying amount, the asset is deemed recoverable, and the test stops.

Step 2: Measuring the Impairment Loss

If the asset group fails the recoverability test, the company must proceed to the second step to calculate the loss. The impairment loss is measured as the amount by which the asset’s carrying amount exceeds its fair value. Fair value is defined under ASC 820 as the price that would be received to sell an asset in an orderly transaction between market participants.

Determining fair value often requires judgment. The most reliable measure is a quoted price in an active market for an identical asset. If that is not available, a company might look at prices for similar assets or use valuation techniques, such as a discounted cash flow analysis.

Numerical Example

Consider a manufacturing company that owns a specialized machine. Due to a new technology introduced by a competitor, the demand for products made by this machine has plummeted, which is a triggering event. The machine has a carrying amount of $500,000 on the company’s books. Management performs the recoverability test by projecting the future net cash flows from the machine’s continued use and eventual sale, which they estimate to be $400,000 on an undiscounted basis.

Since the carrying amount of $500,000 is greater than the undiscounted cash flows of $400,000, the asset fails the recoverability test, and the company must proceed to Step 2. The company then determines the machine’s fair value. After contacting brokers and assessing recent sales of similar equipment, they conclude its fair value is $325,000. The impairment loss is calculated as the carrying amount less the fair value: $500,000 – $325,000 = $175,000. The company must recognize a $175,000 impairment loss.

Recording and Reporting the Impairment

After an impairment loss has been calculated, it is recorded through a journal entry. This entry consists of a debit to an account titled “Impairment Loss” and a credit to the asset’s carrying value, which is done by increasing its associated “Accumulated Depreciation” account.

The recognized impairment loss is reported on the income statement as a component of income from continuing operations. This placement ensures that the loss is presented as part of the company’s core business activities for the period.

Post-Impairment Accounting

Once the impairment loss is recorded, the asset’s carrying amount is reduced. This new, lower carrying amount becomes the asset’s new accounting basis for future periods. Consequently, the depreciation expense for the asset must be recalculated and recognized over its remaining useful life.

A significant rule under U.S. Generally Accepted Accounting Principles (GAAP) is that an impairment loss recognized for an asset held for use cannot be reversed in subsequent periods. This prohibition on reversal prevents companies from manipulating earnings by writing assets down in one period and writing them back up in another.

Financial Statement Disclosures

ASC 360-10 mandates specific disclosures in the notes to the financial statements whenever an impairment loss is recognized. The company must provide a description of the impaired asset or asset group and disclose the facts and circumstances that led to the impairment.

The company must also disclose the amount of the impairment loss and where it is reported in the income statement. The disclosure must include the method or methods used to determine the asset’s fair value. This could include specifying whether the fair value was based on market prices, appraisals, or a discounted cash flow analysis.