ASC 360: Accounting for Impairment and Disposal

Accounting Standards Codification (ASC) 360 provides guidance for how companies account for their long-lived assets, such as property, plant, and equipment, as well as finite-life intangible assets like patents. The standard’s purpose is to ensure these assets are not overstated on a company’s balance sheet. It establishes a framework for recognizing impairment losses, which occur when an asset’s recorded value is unlikely to be recovered through its future use or sale. By requiring companies to write down assets that have lost value, ASC 360 helps financial statements reflect current economic realities.

Scope and Impairment Indicators

ASC 360 applies broadly to long-lived assets that a company holds and uses in its operations. The standard also covers asset groups, which are collections of assets and liabilities that generate cash flows largely independent of other assets. This is a practical approach, as the value of an individual asset is often tied to the entire production line it is part of.

Certain assets fall outside the scope of ASC 360 because they are addressed by other accounting standards. These exclusions include goodwill and indefinite-life intangible assets, which are covered by ASC 350. Financial instruments, deferred tax assets, and mortgage servicing rights are other examples of assets with their own unique accounting rules.

An impairment test is not performed on a fixed schedule but is required whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These “triggering events” are indicators that the asset’s value might have declined.

• A significant decrease in the asset’s market price.
• An adverse change in the legal or regulatory environment.
• A negative shift in the business climate that affects the asset’s use.
• Physical damage to the asset.
• A history of operating or cash flow losses associated with the asset.
• A change in how the company intends to use the asset, such as a decision to idle it.

Impairment of Assets Held and Used

When a triggering event occurs for an asset a company plans to continue using, it must perform a two-step impairment test. The first step is the recoverability test, which checks if the asset’s carrying amount is justified by the cash flows it is expected to generate. Management must project the undiscounted future cash flows that the asset will produce through its remaining useful life.

These projected cash flows are then compared to the asset’s current carrying amount, which is its original cost less any accumulated depreciation. If the sum of the undiscounted cash flows is greater than the carrying amount, the asset is considered recoverable, and no impairment is recognized. The process stops here until another triggering event occurs.

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

If an active market for the asset exists, the quoted market price is the best evidence of fair value. For unique assets without a ready market, companies may use other valuation techniques, such as the expected present value of future cash flows. The impairment loss is recorded as a charge to income, and the carrying amount of the asset is reduced. This new, lower amount becomes the asset’s new accounting basis, and ASC 360 prohibits the subsequent reversal of this impairment loss.

Assets Classified as Held for Sale

The accounting treatment changes when a company decides to sell a long-lived asset rather than continue using it. Before an asset can be accounted for under the “held for sale” model, it must meet a specific set of criteria.

• Management, with the proper authority, must commit to a formal 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 locate a buyer.
• The sale must be probable and is expected to be completed within one year from the date of classification.

These criteria ensure that the “held for sale” classification is used only when there is a genuine plan for disposal.

Once an asset is properly classified as held for sale, it is measured at the lower of its carrying amount or its fair value less costs to sell. “Costs to sell” are the direct, incremental costs associated with the disposal, such as broker commissions and legal fees.

A significant consequence of this classification is that depreciation immediately ceases. If the fair value less costs to sell is lower than the asset’s carrying amount at the time of reclassification, the company recognizes an initial impairment loss. In subsequent periods, if the fair value less costs to sell increases, the company can recognize a gain, but this gain is limited to the cumulative amount of losses previously recognized.

Asset Disposal and Derecognition

The final stage in an asset’s life cycle is its disposal and removal from the company’s financial statements, a process known as derecognition. ASC 360 provides guidance for disposals that occur through means such as abandonment, exchange, or a spin-off. Each scenario has a specific accounting treatment to ensure the asset is properly removed from the books and any resulting gain or loss is recognized.

When a company abandons an asset, it is considered disposed of when it ceases to be used in operations. At that point, the company must recognize a loss equal to the asset’s entire remaining carrying amount. The asset and its related accumulated depreciation are removed from the balance sheet.

In an exchange where an asset is traded for another, the accounting depends on whether the transaction has “commercial substance,” meaning it is expected to change the company’s future cash flows. If the exchange has commercial substance, the transaction is recorded at fair value, and a gain or loss is recognized for the difference between the fair value of the asset given up and its carrying amount. The goal of derecognition is to remove an asset’s value from the balance sheet once it no longer provides economic benefit.

Financial Statement Disclosures

Clear disclosure in the financial statements is a requirement of ASC 360, ensuring that users understand the impact of asset impairments and disposals. The standard mandates specific information be provided in the notes to the financial statements.

When an impairment loss is recognized for an asset that is held and used, the company must disclose:

• A description of the impaired asset and the facts that led to the impairment loss.
• The amount of the impairment loss and the line item in the income statement where the loss is included.
• The method or methods used to determine the asset’s fair value.

For assets classified as held for sale, a different set of disclosures is required. The company must provide:

• A description of the assets and the circumstances that led to the expected disposal.
• The expected manner and timing of the sale.
• The carrying amount of the assets, presented separately on the balance sheet or disclosed in the notes.
• Any gain or loss resulting from the measurement of these assets.