Impairment of Long-Lived Assets: ASC 360 Testing for the CPA Exam
Master long-lived asset impairment testing under ASC 360 for the CPA FAR exam. Covers triggering events, recoverability test, fair value measurement, and asset group determination.
Impairment of Long-Lived Assets Under ASC 360
ASC 360-10-35 provides the framework for testing long-lived assets (other than goodwill and indefinite-lived intangible assets) for impairment. Unlike goodwill, which is tested at least annually, long-lived assets are tested for impairment only when events or changes in circumstances indicate that the carrying amount may not be recoverable. Understanding the two-step impairment test and the triggering events is essential for the CPA FAR exam.
Scope
ASC 360 applies to long-lived assets that are held and used, including property, plant, and equipment; finite-lived intangible assets; and right-of-use assets. It does not apply to goodwill (ASC 350-20), indefinite-lived intangible assets (ASC 350-30), financial instruments (ASC 320/326), or assets held for sale (which have separate ASC 360-10-45 guidance).
Triggering Events
Impairment testing is required only when a triggering event occurs. Examples of events or changes in circumstances that indicate the carrying amount may not be recoverable include:
- A significant decrease in the market price of the asset.
- A significant adverse change in the extent or manner in which the asset is being used or in its physical condition.
- A significant adverse change in legal factors or in the business climate that could affect the asset's value.
- An accumulation of costs significantly in excess of the amount originally expected to acquire or construct the asset.
- A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection that demonstrates continuing losses associated with the asset.
- A current expectation that more likely than not the asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
The Two-Step Impairment Test
Step 1: Recoverability Test
The recoverability test compares the carrying amount of the asset (or asset group) to the undiscounted future net cash flows expected to be generated by the asset's use and eventual disposition. If the carrying amount exceeds the undiscounted cash flows, the asset is not recoverable and an impairment loss must be measured. If the undiscounted cash flows exceed the carrying amount, no impairment exists and no further testing is required.
Key points about the recoverability test: the cash flows are undiscounted (not present value), they include the estimated cash flows from the asset's use over its remaining useful life plus its estimated residual value at disposition, and they are based on the entity's own assumptions about future use. The use of undiscounted cash flows means that the recoverability test is a higher hurdle than fair value -- an asset can have a fair value below its carrying amount and still pass the recoverability test.
Step 2: Measurement of Impairment Loss
If the recoverability test indicates impairment, the impairment loss is measured as the amount by which the carrying amount exceeds the asset's fair value. Fair value is determined under ASC 820, using the hierarchy of inputs (Level 1, 2, or 3). For many long-lived assets, fair value is estimated using Level 3 inputs (discounted cash flow analysis or appraisals).
The impairment loss reduces the carrying amount of the asset to its fair value. This new carrying amount becomes the asset's new cost basis, and the impairment loss is not reversed in subsequent periods if fair value later increases. Depreciation is recalculated prospectively based on the revised carrying amount and remaining useful life.
Asset Grouping
Long-lived assets are tested for impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. This is known as the asset group. For example, a manufacturing plant may be the asset group if its cash flows are largely independent of other assets. The carrying amount of the asset group includes all long-lived assets in the group, plus the carrying amounts of other assets and liabilities directly associated with the asset group's use, such as working capital items.
Assets Held for Sale
When an entity commits to a plan to sell a long-lived asset and certain criteria are met (the asset is available for immediate sale, an active program to locate a buyer has been initiated, the sale is probable within one year, and the asset is being actively marketed at a reasonable price), the asset is classified as held for sale. Assets held for sale are measured at the lower of their carrying amount or fair value less cost to sell. Depreciation ceases once the asset is classified as held for sale.
Exam Preparation Tips
- Remember the two-step test: Step 1 uses undiscounted cash flows (recoverability), Step 2 uses fair value (measurement).
- Know the difference: an asset can fail the fair value test but pass the recoverability test because undiscounted cash flows are higher than discounted.
- Understand asset grouping and how to identify the lowest level of independent cash flows.
- Remember that impairment losses under ASC 360 are not reversible for assets held and used.
- Know the held-for-sale criteria and that depreciation stops once the classification is made.
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