Definition
Under ASC 360-10, an entity tests property, plant, equipment, finite-lived intangibles, and right-of-use assets for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable (triggers include significant adverse market changes, physical damage, and sustained operating losses). The test is two-step: first, compare the carrying amount of the asset group to its undiscounted future cash flows; if carrying amount is higher, the loss equals carrying amount minus fair value. Impairment creates a new cost basis and is not reversed. Assets held for sale are measured at the lower of carrying amount or fair value less cost to sell.
Why it matters in an audit or review
Auditors evaluate whether triggers were identified, the asset group level, and the cash flow forecast used. Forecasts should be consistent with budgets and those used for other estimates.
Example
(Illustrative) A plant has a carrying amount of $4.0 million and undiscounted cash flows of $3.6 million, so it fails step one. Fair value is $2.9 million.
Dr Impairment loss 1,100,000 Cr Accumulated depreciation / asset 1,100,000
Common mistakes
- Using discounted flows for the recoverability step.
- Testing at the single asset level when the group is the lowest cash flow level.
Sources
- FASB ASC 360-10-35 (impairment or disposal of long-lived assets, recoverability test and measurement)
- FASB ASC 842-20-35-9 (right-of-use assets are tested under ASC 360-10)
- FASB ASC 350-30-35-14 (finite-lived intangible assets)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error