Property, plant and equipment, finite-lived intangibles and right-of-use assets are tested for impairment under ASC 360 when something changes. There is no annual test. The test has two stages: a screen using undiscounted cash flows, and a measurement using fair value. Most confusion comes from mixing the two. This guide walks through the asset group, the triggers, both steps and a numerical example with the journal entry. For the wider picture of how ASC 360 and ASC 350 interact in a private company, see impairment of long-lived assets and goodwill for private companies.
What is the asset group?
The asset group is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. PKF O'Connor Davies gives the example of an entity with a headquarters, four retail stores and two manufacturing centers, where each location may be its own asset group. PwC notes that determining a reporting entity's asset groups involves judgment. A production line whose machines feed one product is a typical candidate for a single group.
The grouping decision matters because the test runs on the group. Testing at too low a level can create a loss that does not exist. Testing at too high a level can bury one.
When must the group be tested?
When events or circumstances indicate the carrying amount may not be recoverable. PwC states that ASC 360-10 does not require annual impairment testing of long-lived assets that are held and used, and that the indicators listed in the standard are examples, not the only potential indicators. PKF groups triggers into categories such as negative changes in the broader economy or industry, and fire, significant damage or technological obsolescence. A trigger starts the test; a loss is recorded only if the group fails step one and fair value is below carrying amount.
What is step one, the recoverability test?
Compare the carrying amount of the asset group to its undiscounted cash flows. The group is recoverable when the entity-specific undiscounted cash flows expected from use and eventual disposition exceed its carrying amount. Wipfli adds that the cash flows include expected inflows over the remaining useful life, the outflows needed to generate them, including normal repairs and maintenance, and disposal proceeds, and that only facts and circumstances at the triggering date count.
If the group passes, no loss is recorded, even when carrying amount is above fair value. If it fails, move to step two.
What is step two, measuring the loss?
The loss is the excess of the group's carrying amount over its fair value, measured under ASC 820. PKF advises that valuations incorporate market participant assumptions and that key inputs be documented. The loss is recorded at the triggering event as a period cost, according to Wipfli. Depreciation estimates are adjusted to reflect the reduced carrying amount.
Worked example
Illustration only, with round numbers. A packaging company has a production line, treated as one asset group, with a carrying amount of $5,000,000 after a major customer announces it is moving its volume elsewhere. The loss of a key customer is a trigger.
Management forecasts the undiscounted net cash flows from the line over its remaining life, including expected disposal proceeds, at $4,600,000. That is below $5,000,000, so the group fails step one.
A valuation using market participant assumptions puts fair value at $3,800,000.
Loss: $5,000,000 minus $3,800,000 equals $1,200,000.
| Account | Debit | Credit |
|---|---|---|
| Impairment loss on long-lived assets | $1,200,000 | |
| Accumulated impairment (or the related asset accounts) | $1,200,000 |
Now change one fact. If forecast undiscounted cash flows had been $5,200,000, the group passes step one. No loss is recorded, even though fair value of $3,800,000 is well below carrying amount.
The new carrying amount of $3,800,000 is depreciated over the remaining life. PKF states that long-lived assets generally cannot be written back up under US GAAP unless another standard specifically requires it, so a later recovery in value does not reverse the loss.
Audit angle
The test turns on management's cash flow forecast and the valuation, both estimates. See auditing accounting estimates for the general approach. Procedures that fit this area:
- Trigger identification. Read board minutes, covenant compliance certificates, customer correspondence and the budget. Look for events that indicate impairment that management did not assess.
- Asset group. Obtain the grouping and the support. Check that it is consistent with how the business generates cash flows and with prior years.
- Cash flow forecast. Compare to approved budgets, historical results and contracts. Test the useful life used, the capital expenditure needed to maintain the asset and the disposal value. Evaluate whether assumptions favor passing step one.
- Fair value. Evaluate the method, inputs and market participant assumptions. If a valuation specialist was used, see using the work of a specialist and fair value measurement.
- Recording and disclosure. Recompute the loss, check the income statement caption and the disclosure of the facts and circumstances, loss amount, fair value method and key assumptions. PKF lists these disclosure items.
Common misstatements: no test after an obvious trigger, cash flows built on a growth case the business has not delivered, discounted cash flows used in the recoverability screen, and a loss measured against the undiscounted figure instead of fair value.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- PwC, Bankruptcies and liquidations guide, 2.2 Asset impairments: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/bankruptcies_and_liq/bankruptcies_and_liq_US/chapter_2_accounting_US/22_asset_impairments_US.html
- PKF O'Connor Davies, Impairing long-lived assets for public and private entities: https://www.pkfod.com/insights/impairing-long-lived-assets-for-public-and-private-entities/
- Wipfli, Is your property, plant and equipment impaired?: https://www.wipfli.com/insights/articles/aa-dont-overlook-your-impairment-loss-accounting
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