, Property, Plant, and Equipment
, indicates that long-lived assets within an asset group should be tested for recoverability whenever events or circumstances indicate that the carrying amount of the long-lived assets may not be recoverable. An asset or asset group is considered to be recoverable when the sum of the undiscounted cash flows expected to be generated from the asset or asset group is greater than its carrying amount. This analysis is the first step of the impairment test of long-lived assets. If an asset group is not recoverable based on the results of step one, the second step determines the extent of impairment, if any, by comparing the fair value of the asset group to its carrying amount. If the carrying amount of an asset group is recoverable (i.e., passes step one), the reporting entity is precluded from recognizing an impairment charge, even if the fair value of the asset group, or any individual asset within the group, is less than its carrying amount.
Companies should evaluate whether a bankruptcy filing impacts management’s intended use of such assets (e.g., will they continue to be operated for their remaining useful lives or sold during bankruptcy to provide liquidity). But even before the filing, significant operating or cash flow losses that typically precede a bankruptcy filing would often trigger an impairment assessment of the long-lived assets. The cash flow forecasts used to test for recoverability would consider the likelihood of various outcomes, including whether a bankruptcy filing would occur and, if so, how that filing might impact the future cash flows and operations of the asset group. If a reporting entity is having difficulty financing its operations and if customers are unwilling to purchase from, or suppliers are unwilling to sell to, the reporting entity because it is considering bankruptcy, these factors would impact the cash flow projections used in the recoverability test for long-lived assets in most scenarios. A probability-weighted cash flow analysis is often used to assess recoverability when various outcomes, such as continued operation, sale, liquidation, or operating and emerging from bankruptcy, are considered.
The method of depreciation and the remaining useful lives of a reporting entity’s long-lived assets should also be evaluated when impairment tests are performed even if the asset (asset group) is determined to be recoverable. For example, this evaluation may indicate that the anticipated life of a manufacturing facility should be shortened in light of reduced production volumes, resulting in increased depreciation over the remaining term.
If goodwill is included in an asset group (i.e., an asset group is the same as a reporting unit for impairment testing) to be held and used, the impairment testing should be performed in the following order:
- Test other assets (e.g., accounts receivable, inventory) under applicable guidance, and indefinite-lived intangible asset(s), other than goodwill, under ASC 350
- Test long-lived assets (asset group) under ASC 360-10
- Test goodwill of the reporting unit that includes the aforementioned assets under ASC 350
The carrying values are adjusted, if necessary, for the result of each test prior to the next test. This order differs from the held-for-sale approach, which prescribes that goodwill be tested for impairment prior to the asset disposal group. The order of assessment may impact the recorded amount of any impairment losses.
See PPE 5
for further discussion of the long-lived asset impairment model.