Unlike goodwill and indefinite-lived intangible assets, which are required to be tested for impairment at least annually, ASC 360-10
does not require annual impairment testing for long-lived assets that are held and used. Instead, a long-lived asset (asset group) that is held and used should be tested for recoverability whenever events or circumstances indicate that the carrying amount of the long-lived asset (asset group) may not be recoverable. Examples of such events or changes in circumstances, commonly referred to as impairment indicators or triggering events, are detailed in ASC 360-10-35-21
. The examples provided should not be considered the only potential indicators that an asset (asset group) may not be recoverable.
When a reporting entity identifies an impairment indicator, it should perform a recoverability test, which is the first of two steps in the impairment test of long-lived assets. An asset (asset group) is considered to be recoverable when the entity-specific, undiscounted cash flows expected to be generated from the use and eventual disposition of the asset (asset group) are greater than its carrying amount. Depending on the reporting entity’s facts and circumstances, the use of an expected cash flow approach using a probability-weighted average of all possible cash flows, or the use of a single set of cash flows representing management’s best estimate of the most likely outcome within a range of possible estimated amounts, may be appropriate. PPE 188.8.131.52
discusses this in more detail.
If the asset (asset group) is not recoverable (i.e., the net carrying value exceeds the entity-specific, undiscounted net cash flows), an impairment loss should be recognized based on the amount by which the carrying value of the asset (asset group) exceeds its fair value, which should be calculated based on the guidance in ASC 820-10
The carrying amounts of any assets in the asset group that are not within the scope of ASC 360-10
(e.g., accounts receivable, inventory, indefinite-lived intangible assets other than goodwill) should be tested for impairment in accordance with other US GAAP prior to performing the impairment test on the long-lived assets (asset group). The carrying values are adjusted, if necessary, for the result of each impairment test prior to performing the next test. The determination of a reporting entity’s asset groups involves judgment and all relevant facts and circumstances should be considered. See PPE 5.2.1
for additional information on making this determination.
As discussed in PPE 184.108.40.206
, reporting entities 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 beyond the expected emergence from bankruptcy or sold during bankruptcy to provide liquidity). 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 will 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. A probability-weighted cash flow analysis based on the facts and circumstances as of the trigger date is often used to assess recoverability when various outcomes, such as continued operation, sale, liquidation, or operating and emerging from bankruptcy, are considered.
Reporting entities should consider the appropriate disclosures when a bankruptcy filing occurs after the balance sheet date but before the date the financial statements are issued or available to be issued. Bankruptcy as a subsequent event is discussed in BLG 2.11
. Additionally, as discussed in PPE 220.127.116.11
, cash flow estimates should not be adjusted for a subsequent bankruptcy filing (i.e., cash flow estimates should reflect conditions and assumptions that existed as of the measurement date).
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.
See PPE 5.2
for further discussion of the impairment model for long-lived assets to be held and used.