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6.3 Disposals other than by sale

Publication date: 30 Nov 2023

us PP&E and other assets guide

A long-lived asset may be disposed of other than by sale. This section discusses disposals by abandonment (see PPE 6.3.1), nonreciprocal transfers to owners, for example a spinoff or split-off (see PPE 6.3.2 and PPE 6.3.3), involuntary conversions (see PPE 6.3.4), donations of long-lived assets (see PPE 6.3.5), and exchanges of nonmonetary assets (see PPE 6.3.6).

6.3.1 Accounting for long-lived assets to be abandoned

A long-lived asset to be abandoned is considered disposed of when it ceases to be used. For example, equipment that a reporting entity plans to dispose of, but only after it is used to fulfill current orders, is not considered abandoned while it is still in use because the reporting entity receives an ongoing benefit from the equipment. Further, a temporarily idled asset is not considered abandoned as the asset will be used in the future. ASC 360-10-35-48 states that only in unusual situations is the fair value of a long-lived asset to be abandoned zero while it is still being used.

If a reporting entity commits to a plan to abandon a long-lived asset before the end of its previously estimated useful life, it should first test the asset for impairment under the held-and-used impairment guidance of ASC 360-10 (i.e., at the asset group level). After recognizing any resulting impairment, the reporting entity should then revise its future depreciation to reflect the use of the asset over its shortened remaining useful life.

In certain scenarios, the broader asset group may not fail the recoverability test under the ASC 360-10 held-and-used impairment guidance and no impairment would be recognized (e.g., when the asset to be abandoned is insignificant to the overall asset group). However, adjustment of the useful life of the to-be-abandoned asset may still be necessary in accordance with ASC 360-10-35-47. When the reporting entity ceases use of the long-lived asset, its carrying value should equal zero or its salvage value, if any.

Example PPE 6-12 illustrates the accounting for a long-lived asset to be abandoned.

EXAMPLE PPE 6-12
Accounting for an asset to be abandoned

Manufacturing Co has machines used in its manufacturing process that it plans to abandon when the upgraded replacement machines are delivered and placed in service. No proceeds are expected upon abandonment. The original machines were placed in service three years ago and are being depreciated on a straight-line basis over 10 years, with no salvage value expected at the end of 10 years. Abandonment cannot occur prior to the receipt and installation of the replacement machines, which is expected to occur in December 20X2, at which point the reporting entity will cease use of the original machines. Management began re-evaluating the efficiency of the original machines in early 20X1. It had included in its 20X2 capital expenditures budget, which was finalized and approved in June 20X1, an estimated amount to purchase the new machines. The Company considered whether the original machines were impaired under the held-and-used impairment guidance of ASC 360-10 and concluded that the overall asset group was recoverable.

How should Manufacturing Co account for the assets to be abandoned?

Analysis

Because the machines will remain in use through December 20X2, the assets should not be considered abandoned until that time. The asset group that includes the machine is not impaired on a held-and-used basis, so no impairment loss should be recognized at the time Manufacturing Co decides it will abandon the machines. However, because Manufacturing Co plans to abandon the machines before the end of their previously estimated useful lives of 10 years, the useful lives of the assets should be adjusted in June 20X1, when Manufacturing Co commits to a plan to abandon the machines. As a result, Manufacturing Co would depreciate the remaining carrying amounts of the machines over their revised useful lives of approximately 18 months.

6.3.1.1 Right-of-use asset abandonment

As discussed in PPE 4.2.4, the subsequent measurement of a right-of-use (ROU) asset is subject to the guidance in ASC 842 and ASC 360-10. Refer to LG 4.4, for further details regarding the subsequent recognition and measurement of a lease under ASC 842. ASC 360-10 includes guidance related to the impairment and useful lives of long-lived assets. Similar to other long-lived assets, a ROU asset may be abandoned.

When a lessee decides to cease use of a leased asset under an operating lease either immediately or in the future, it should consider whether the ROU asset is or will be abandoned. For leased space, the ROU asset is generally not abandoned until the date the space is fully vacated and the lessee has no intention to further benefit from the leased space. Temporarily idling a ROU asset (e.g., leaving leased space unoccupied with plans to return at a future date) is not considered an abandonment under ASC 360-10-35-49. Additionally, a decision to sublease a leased asset does not constitute an abandonment as the lessee still intends to obtain economic benefits from the asset, just in a different capacity.

In some scenarios, a lessee may be uncertain as to whether it will sublease the leased asset. In these situations, we do not believe the ROU asset is abandoned because the lessee could potentially economically benefit from the ROU asset in the future, either through the lessee’s use or sublease. As a result, the ROU asset should continue to follow the held-and-used long-lived asset guidance of ASC 360-10, including for impairment and useful life considerations.

Alternatively, a lessee may assert that, despite having the contractual ability to do so, it has no plans to sublease the leased asset (e.g., when there is an oversaturation of supply in the real estate market). In this scenario, judgment is required to support a conclusion that the ROU asset is or will be abandoned. For example, when a lessee has a significant remaining lease term, it may be difficult to support abandonment, especially when a reasonable party would likely attempt to economically benefit from the leased space at some point in the future (e.g., through subleasing or alternative use). Alternatively, when there is an insignificant remaining lease term and the lessee can support that the leased space will not be used, or there is no reasonable possibility of subleasing the space for the remainder of the lease term, abandonment accounting may be appropriate.

Once a decision is made to abandon a ROU asset, the lessee should first consider whether any of the conditions in ASC 842-10-35-1 exist that would require reassessment of the lease term and lease classification. See LG 5.3 for information on circumstances that may require lease remeasurement. A lessee should also consider whether changes to lease components (e.g., in the case of a partial abandonment of leased space) or asset groups are necessary. A plan to abandon a ROU asset may not, in isolation, cause a reassessment of an asset grouping, particularly if the lessee is continuing to use the underlying asset in substantially the same manner for a period of time after the decision (i.e., the level of identifiable cash flows have not yet materially changed).

Regardless of whether asset groups change, the lessee should consider whether plans to abandon a ROU asset represent an impairment indicator at the asset group level. A long-lived asset (asset group) that is held and used should be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset (asset group) may not be recoverable. ASC 360-10-35-21 provides indicators of impairment, including a significant adverse change in the extent or manner in which an asset (asset group) is being used. As such, the decision to abandon a ROU asset may be an indicator that an impairment test is required for the asset group. Determining whether a plan to abandon a ROU asset results in an impairment indicator to a broader asset group will require judgment and will in part be determined by the significance of the ROU asset to the overall asset group. See PPE 6.3.1 for information on the interaction between abandonment accounting and the long-lived asset impairment guidance. Additionally, see PPE 5.2.3 for information on evaluating long-lived asset impairment triggering events and PPE 5.2.7 through PPE 5.2.7.3 for information on applying the ASC 360-10 held-and-used impairment guidance to ROU assets.

After recognizing and measuring any impairment under ASC 360-10, adjustment of the useful life of the to-be-abandoned ROU asset may be necessary in accordance with ASC 360-10-35-47. The useful life assessment of a long-lived asset is based on the lessee’s assumption of the length over which it intends to use the asset. When the ROU asset is actually abandoned, its carrying amount should equal its salvage value as of the cease-use date.

If a ROU asset has not been impaired but its useful life has been shortened, one acceptable approach to subsequently account for the lease is to follow the accounting for a ROU asset that has been impaired, in which case amortization of the ROU asset and lease liability would be delinked in the subsequent accounting (see PPE 5.2.7.3). Example PPE 6-13 illustrates this delinked approach to account for the change in the remaining useful life of a ROU asset when it has not been impaired.

Another acceptable approach to subsequently account for the lease is to retain the linkage between the ROU asset amortization and the lease liability. In this case, the straight-line lease expense should be remeasured over the shortened useful life, which is consistent with the guidance in ASC 842-20-25-6(a). Example PPE 6-14 illustrates this linked approach to account for the change in the remaining useful life of a ROU when it has not been impaired.

EXAMPLE PPE 6-13
Accounting for a right-of-use asset to be abandoned (delinked approach)

Lessee Corp leases a specialized facility in a remote location from Lessor Corp on January 1, 20X1. Lessee Corp determines that the lease is an operating lease. The following table summarizes information about the lease and the leased asset.


Lease term	8 years, no renewal option
Economic life of the building	40 years
Purchase option	None
Monthly lease payments	No lease payments are due for the first three months; the remaining monthly lease payments are $200,000
Payment date	Beginning of the month
Lessee Corp’s incremental borrowing rate	6%. The rate Lessor Corp charges Lessee Corp in the lease is not readily determinable by Lessee Corp
Other	There are no additional provisions in the lease that would impact its classification or measurement

How would Lessee Corp measure and record this lease?

Analysis

Lessee Corp would first calculate the lease liability as the present value of the remaining unpaid monthly fixed lease payments discounted at Lessee Corp's incremental borrowing rate of 6%; this amount is $14,624,994. The ROU asset is equal to the lease liability on the lease commencement date. Lessee Corp would record the following journal entry on the lease commencement date.

Because Lessee Corp is required to pay $200,000 per month for eight years (excluding the first three months), the total lease payments are $18,600,000 ($200,000 × 93 months). Lessee Corp would then calculate the straight-line lease expense to be recorded each period by dividing the total lease payments by the total number of periods. The monthly straight-line expense would be $193,750 ($18,600,000/96 months).

Lessee Corp would calculate the amortization of the lease liability as shown in the following table. This table is shown on an annual basis for simplicity; the schedule would be calculated on a monthly basis to reflect the frequency of the lease payments.

	Payment	"Interest" on the lease liability*	Lease liability
Lease commencement			$14,624,994
Year 20X1	$1,800,000	$865,614	13,690,608
Year 20X2	2,400,000	777,295	12,067,903
Year 20X3	2,400,000	677,209	10,345,112
Year 20X4	2,400,000	570,951	8,516,063
Year 20X5	2,400,000	458,140	6,574,203
Year 20X6	2,400,000	338,370	4,512,573
Year 20X7	2,400,000	211,213	2,323,786
Year 20X8	2,400,000	76,214	__
	$18,600,000	$3,975,006
^*Although these amounts are labelled as "interest," there is no interest expense recorded in the income statement. These amounts are calculated based on the lease liability on a monthly basis in order to determine the ending balance of the lease liability; however, there is only one straight-line lease expense recorded in the income statement. See LG 4.4.2 for additional information.

The amortization of the right-of-use asset is calculated as the difference between the straight-line lease expense ($193,750 per month) and the interest calculated on the lease liability. The following table shows this calculation. This table is shown on an annual basis for simplicity; the schedule would be calculated on a monthly basis to reflect the frequency of the lease payments.

	Straight-line expense (A)	Interest on lease liability (B)	Amortization (A - B)	ROU asset
Lease commencement				$14,624,994
Year 20X1	$2,325,000	$865,614	$1,459,386	13,165,608
Year 20X2	2,325,000	777,295	1,547,705	11,617,903
Year 20X3	2,325,000	677,209	1,647,791	9,970,112
Year 20X4	2,325,000	570,951	1,754,049	8,216,063
Year 20X5	2,325,000	458,140	1,866,860	6,349,203
Year 20X6	2,325,000	338,370	1,986,630	4,362,573
Year 20X7	2,325,000	211,213	2,113,787	2,248,786
Year 20X8	2,325,000	76,214	2,248,786	__
	$18,600,000	$3,975,006	$14,624,994

For the year ended December 31, 20X1, the following cumulative journal entries would have been recorded by Lessee Corp.

If on December 31, 20X5, Lessee Corp determines that it will only use the facility through December 31, 20X6 (assume Lessee Corp has concluded that the residual value will be $0), Lessee Corp would adjust the remaining useful life to one year. Doing so has no impact on the accounting for the lease liability. However, the change in the useful life would impact the accounting for the ROU asset and its subsequent amortization.

On December 31, 20X5, Lessee Corp would calculate the straight-line amortization of the right-of-use asset to be recorded each period for the remaining useful life by dividing the right-of-use asset balance ($6,349,203) by the remaining useful life (one year). The monthly straight-line amortization for the remaining useful life of the right-of-use asset would be $529,100 ($6,349,203/12 months). Subsequent to December 31, 20X6, the monthly lease expense would be equal to the effective interest on the lease liability for the remainder of the lease term.

The following table shows the annual accounting amortization and calculation. This table is shown on an annual basis for simplicity; the schedule would be calculated on a monthly basis to reflect the frequency of the lease payments.

	Lease expense (A+B)	Interest on lease liability (A)	Amortization (B)	ROU asset
Year 20X5				$6,349,203
Year 20X6	$6,687,573	$338,370	$6,349,203	__
Year 20X7	211,213	211,213	__	__
Year 20X8	76,214	76,214	__	__
	$6,975,000	$625,797	$6,349,203

For the year ended December 31, 20X6, the following cumulative journal entries would have been recorded by Lessee Corp.

For the year ended December 31, 20X7, the following cumulative journal entries would have been recorded by Lessee Corp.

EXAMPLE PPE 6-14
Accounting for a right-of-use asset to be abandoned (linked approach)

Assume the same facts and accounting for the lease from inception through December 31, 20X5 as Example PPE 6-13. How would Lessee Corp account for the change in the remaining useful life of the right-of-use asset using the linked approach?

Analysis

On December 31, 20X5, Lessee Corp would calculate the straight-line lease expense to be recorded each period for the remaining useful life by dividing the right-of-use asset balance ($6,349,203) and the remaining interest on the lease liability ($625,797) by the remaining useful life (one year). The monthly straight-line lease expense for the remaining useful life of the right-of-use asset would be $581,250 (($6,349,203 + $625,797)/12 months). Subsequent to December 31, 20X6, the monthly straight-line lease expense would be $0 for the remainder of the lease term.

The amortization of the ROU asset would be calculated as the difference between the straight-line lease expense and the interest calculated on the lease liability. The following table shows this calculation. This table is shown on an annual basis for simplicity; the schedule would be calculated on a monthly basis to reflect the frequency of the lease payments.

	Straight-line expense (A)	Interest on lease liability (B)	Amortization (A - B)	ROU asset
Year 20X5				$6,349,203
Year 20X6	$6,975,000	$338,370	$6,636,630	(287,427)*
Year 20X7	__	211,213	(211,213)	(76,214)*
Year 20X8	__	76,214	(76,214)	__
	$6,975,000	$625,797	$6,349,203
* When a ROU asset is negative it is presented as a liability.

For the year ended December 31, 20X6, the following cumulative journal entries would have been recorded by Lessee Corp.

For the year ended December 31, 20X7, the following cumulative journal entries would have been recorded by Lessee Corp.

6.3.2 Nonreciprocal transfer of assets in a spinoff

A nonreciprocal transfer of assets to owners of a reporting entity could be in the form of a pro rata spinoff or a non-pro rata split-off. Nonreciprocal transfers of assets in a split-off are discussed in PPE 6.3.3.

ASC 505-60-20 defines a spinoff.

Definition from ASC 505-60-20

Spinoff: The transfer of assets that constitute a business by an entity (the spinnor) into a new legal spun-off entity (the spinnee), followed by a distribution of the shares of the spinnee to its shareholders, without the surrender by the shareholders of any stock of the spinnor.

In accordance with ASC 845-10-30-10, a transfer of long-lived assets that constitute a business to owners in a spinoff should be accounted for based on the recorded amount of the assets transferred (after reduction, if appropriate, for any impairment). In contrast, if the long-lived assets transferred do not constitute a business, the transaction is not a spinoff even though the distribution is pro rata. Rather, it would be considered a dividend in kind, which is generally accounted for based on the fair value of the assets transferred.

If a long-lived asset is to be disposed of in an exchange or a distribution to owners in a spinoff, and if that exchange or distribution is to be accounted for based on the recorded amount of the nonmonetary asset relinquished, the asset should continue to be accounted for as held and used until it is exchanged or distributed. If a reporting entity tests that asset for recoverability while it is classified as held and used, the estimates of future cash flows that are used in that test should be based on the use of the asset for its remaining useful life, assuming that the exchange or distribution transaction will not occur. In accordance with ASC 360-10-40-4, in addition to any impairment losses a reporting entity is required to recognize while the long-lived asset is classified as held and used, an impairment loss should also be recognized when the asset is disposed of if the carrying amount of the disposal group exceeds its fair value.

If the business to be disposed of includes a foreign entity, any cumulative translation adjustment (CTA) balance associated with the foreign entity is released at the date of spin in accordance with ASC 830. However, as spinoff transactions are accounted for under the carryover basis of accounting, the spinnor would not record a gain or loss, consistent with ASC 505-60-25-2 and ASC 845-10-30-10. Instead, the spinnor would record a reclassification within equity (i.e., from AOCI to APIC).

ASC 505-60 addresses whether or not to account for a spinoff as a reverse spinoff based on the substance instead of the legal form of the transaction. There is a rebuttable presumption that the spinoff should be accounted for based on its legal form (i.e., the legal spinnor is also the accounting spinnor). ASC 505-60-25-8 provides several indicators to consider when deciding if the presumption to account for the transaction based on legal form should be overcome. However, no single indicator should be considered presumptive or determinative. When the indicators are mixed, judgment will be required to determine whether the presumption has been overcome and the substance of the transaction is a reverse spin.

Excerpt from ASC 505-60-25-8

The size of the legal spinnor and the legal spinnee. All other factors being equal, in a reverse spinoff, the accounting spinnor (legal spinnee) is larger than the accounting spinnee (legal spinnor). The determination of which entity is larger is based on a comparison of the assets, revenues, and earnings of the two entities. There are no established bright lines that shall be used to determine which entity is the larger of the two.
The fair value of the legal spinnor and the legal spinnee. All other factors being equal, in a reverse spinoff, the fair value of the accounting spinnor (legal spinnee) is greater than that of the accounting spinnee (legal spinnor).
Senior management. All other factors being equal, in a reverse spinoff, the accounting spinnor (legal spinnee) retains the senior management of the formerly combined entity. Senior management generally consists of the chairman of the board, chief executive officer, chief operating officer, chief financial officer, and those divisional heads reporting directly to them, or the executive committee if one exists.
Length of time to be held. All other factors being equal, in a reverse spinoff, the accounting spinnor (legal spinnee) is held for a longer period than the accounting spinnee (legal spinnor). A proposed or approved plan of sale for one of the separate entities concurrent with the spinoff may identify that entity as the accounting spinnee.

For SEC registrants that have concluded that a transaction should be accounted for as a reverse spinoff, a question arises as to whether the financial statements of the existing registrant (i.e., the legal spinnor/accounting spinnee) can be used to satisfy the financial statement requirements of the entity that will be spun off (i.e., the accounting spinnor/legal spinnee). In an SEC staff speech, the staff expressed its view that this assessment should be based on the unique facts and circumstances of each transaction, and there may be situations in which carve-out financial statements are required for the accounting spinnor/legal spinnee. See FSP 27.4.3.1 for further discussion of the presentation of spinoff transactions.

6.3.3 Nonreciprocal transfer of assets in a split-off

A nonreciprocal transfer of assets to owners of a reporting entity could be in the form of a pro rata spinoff or a non-pro rata split-off. Nonreciprocal transfers of assets in a spinoff are discussed in PPE 6.3.2.

A split-off transaction is a non-pro rata distribution that may or may not involve all shareholders. A split-off transaction usually involves a substantive parent entity offering its noncontrolling shareholders the ability to exchange any or all of their equity shares of the parent entity, subject to a cap if oversubscribed, for shares of a subsidiary at a specified exchange rate. A non-pro rata split-off is akin to a sale. ASC 845-10-20 defines a split-off.

Definition from ASC 845-10-20

Split-off: A transaction in which a parent entity exchanges its stock in a subsidiary for parent entity stock held by its shareholders.

Non-pro rata split-off transactions that are accounted for under ASC 845-10-30-12 are based on the fair value of the assets transferred, regardless of whether the subsidiary being split-off constitutes a business in a corporate plan of reorganization. A split-off of nonfinancial assets and in substance nonfinancial assets is accounted for under ASC 610-20. See PPE 6.2.5 for details regarding the determination of the transaction price. A split-off to a controlling shareholder is a common control transaction and would be accounted for based on the recorded amount of the assets transferred.

Since a split-off transaction is akin to a sale transaction, the long-lived asset impairment test should be performed in accordance with the held for sale guidance at the time the long-lived asset is classified as held for sale. See PPE 5.3.3.

6.3.4 Involuntary conversions

Involuntary conversions of nonmonetary assets to monetary assets are considered monetary transactions. Examples of such conversions are total or partial destruction or theft of insured long-lived assets and the condemnation of property in eminent domain proceedings. Any gain or loss from the conversion should be fully recognized as a component of income, even if the reporting entity reinvests or is obligated to reinvest the recovery in a replacement long-lived asset. Often, losses from involuntary conversions are covered by insurance. See PPE 8.2 for further information on insurance recoveries. See FSP 3.6.10 for discussion of the income statement classification of gains or losses resulting from an involuntary conversion and FSP 6.8.21 for discussion of the cash flow presentation of insurance proceeds. Additionally, ASC 606 reorganized the guidance for involuntary conversions, moving it from ASC 605-40 to ASC 610-30.

6.3.5 Donations of long-lived assets

The donation of a long-lived asset or disposal group is also considered a disposal by other than sale and would follow the held and used accounting model until disposal in accordance with ASC 360-10-45-15.

6.3.6 Exchanges of nonmonetary assets

Subsequent to the adoption of ASC 606 and ASC 610-20, the guidance in ASC 845 will exclude transactions with customer or non-customers in exchange for noncash consideration. Accordingly, many nonmonetary transactions will be in the scope of ASC 606 and ASC 610-20. The consideration transferred will include noncash consideration (i.e., nonmonetary assets) measured at its fair value at contract inception (see RR 4.5.1 for details). ASC 610-20 does not amend existing practice for nonreciprocal transfers with owners (see PPE 6.3.2 and PPE 6.3.3) and non-derivative purchases and sales of inventory with the same counterparty, in which case qualifying transactions are recognized at the carrying amount of the inventory transferred (see ASC 845-10-30-15 through ASC 845-10-30-16). See PPE 2.3.1.1 for details regarding the accounting for an asset acquired in a nonmonetary exchange.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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6.3 Disposals other than by sale

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Dr. Lease expense	$2,325,000
Dr. Lease liability	$934,386
Cr. ROU asset		$1,459,386
Cr. Cash		$1,800,000

Dr. Lease expense	$6,687,573
Dr. Lease liability	$2,061,630
Cr. ROU asset		$6,349,203
Cr. Cash		$2,400,000

Dr. Lease liability	$2,188,787
Dr. Lease expense	$211,213
Cr. Cash		$2,400,000

Dr. Lease expense	$6,975,000
Dr. Lease liability	$2,061,630
Cr. ROU asset		$6,636,630
Cr. Cash		$2,400,000

Dr. Lease liability	$2,188,787
Dr. ROU asset	$211,213
Cr. Cash		$2,400,000

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