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12.5 Asset impairment and assets held for sale
Publication date: 19 Jan 2024
us Utilities guide
ASC 360 requires that a long-lived asset (asset group) be tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Such events are commonly referred to as triggering events. Changes in power markets, evolving power plant technologies, and the persistent increase in environmental requirements for fossil fuels have all driven a continued focus on the recoverability of plant assets and the need for robust impairment evaluations. Reporting entities should monitor such changes and the impact on their power plants and other long-lived assets on an ongoing basis to determine whether there has been a trigger requiring an impairment analysis. ASC 360-10-35-21 also provides examples of six specific indicators that may indicate impairment, including a decrease in market prices, adverse change in physical condition, or adverse changes in legal factors or the business climate.
The impairment guidance for long-lived assets to be held and used applies to, among other things: (1) a right-of-use asset recorded by lessees, (2) long-lived assets of lessors subject to operating leases, (3) proved oil and gas properties that are being accounted for using the successful efforts method, and (4) long-term prepaid assets. See PPE 5.2 for a discussion of impairment issues for long-lived assets to be held and used. The following section (UP 12.5.1) supplements PPE 5.2 by discussing certain industry-specific issues related to applying the ASC 360 framework to assets held and used.
Once all the criteria in ASC 360-10-45-9 are met, a long-lived asset (disposal group) should be classified as held for sale and the disposal group should be reported at the lower of its carrying value or fair value less cost sell beginning in the period the held for sale criteria is met. The carrying amount of the asset (disposal group) should be adjusted each reporting period for subsequent changes in the fair value less cost to sell. See PPE 5.3 for a discussion of accounting for assets held for sale. UP 12.5.2 supplements the guidance in PPE 5.3 by addressing certain matters associated with assets held for sale within the power and utilities industry.
Additionally, see UP 18.7 for information about disallowances and abandonment issues related to regulated utility plant.
12.5.1 Long-lived assets to be held and used
The first step in testing long-lived assets held and used for impairment is determining the unit of account. ASC 360 provides specific guidance on how to consider assets and asset groups when evaluating long-lived assets that are to be held and used.
Excerpt from ASC 360-10-35-23
For purposes of recognition and measurement of an impairment loss, a long-lived asset or assets shall be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
Determining the appropriate unit of account (whether a stand-alone asset or asset group) is a key aspect in testing and measuring impairment of long-lived assets held and used. The determination involves a significant amount of judgment, and all relevant facts and circumstances should be considered as described in ASC 360-10-55-35.
Varying facts and circumstances will inevitably justify different groupings of assets for impairment review. While grouping at the lowest level for which there are identifiable cash flows for recognition and measurement of an impairment loss is understood, determining that lowest level requires considerable judgment.
Characteristics specific to the operations of the reporting entity and its business environment should be assessed in evaluating the lowest level of identifiable cash flows. Factors to consider include:
- Are there any interdependencies in revenue-generating activities? Interdependencies may result from regulatory, legal, or contractual restrictions or otherwise arise based on whether and how the reporting entity manages and operates its assets as a group.
- Are the assets used together in vertically integrated operations?
- Do the assets have a shared cost structure? If a particular asset group has significant shared operations and cash flows, it may be necessary to group assets at a higher level. However, the existence of shared service activities alone would not necessarily require grouping assets if the shared services are not considered significant.
The determination of asset groups may be particularly complex when considering utility and power generation assets such as power plants, transmission assets, or natural gas distribution assets. These assets are often interdependent due to contractual or other requirements. ASC 360-10-55-36 (Example 4) illustrates the evaluation for an entity that operates bus routes, which has considerations similar to those relevant for utility and power assets. A similar example can be found in PPE 5.2.1 (Example PPE 5-1).
Excerpt from ASC 360-10-55-36
In this Example, an entity operates a bus entity that provides service under contract with a municipality that requires minimum service on each of five separate routes. Assets devoted to serving each route and the cash flows from each route are discrete. One of the routes operates at a significant deficit that results in the inability to recover the carrying amounts of the dedicated assets. The five bus routes would be an appropriate level at which to group assets to test for and measure impairment because the entity does not have the option to curtail any one bus route.
As noted in the excerpt, depending on the facts and circumstances, it may be appropriate to group assets even if the cash flows for individual assets are identifiable.
Question UP 12-10
Is it appropriate to combine more than one generating plant into an asset group?
Is it appropriate to combine more than one generating plant into an asset group?
PwC response
It depends. In some cases, the lowest level of identifiable cash flows may be at the single power plant level, which would then be the asset group. This may be the case if the output from the plant is sold under a single contract and the plant is stand-alone (i.e., not considered a “must run” unit within a control area or otherwise does not have operations that are interrelated with other plants). In other cases, a power plant’s output may be used in the balancing of a system or the power plant may be part of a system (e.g., the plant provides reliability for other units in the system or is dispatched as part of a group). Furthermore, a regulator may consider a regulated utility’s power plants in combination when evaluating revenue requirements. In such cases, even if the cash flows of the plant are separately identifiable, regulatory, legal, or contractual requirements may indicate that the plant should be grouped with other plants.
Determining whether power plants should be grouped requires an analysis of the environment in which the plant is dispatched; whether the output of the plant is contracted; and any other legal, contractual, and operating requirements. Reporting entities should consider similar factors in assessing the appropriate asset group for other utility or power assets, such as transmission or natural gas distribution assets.
Question UP 12-11
Should plant-specific power purchase agreements be combined with the related power plant(s) in an asset group when recognizing and measuring impairment?
Should plant-specific power purchase agreements be combined with the related power plant(s) in an asset group when recognizing and measuring impairment?
PwC response
It depends. ASC 360-10-35-23 addresses the recognition and measurement of asset impairments and requires that assets be “grouped” and measured for impairment at the lowest level of identifiable cash flows. In the case of a plant-specific power purchase agreement, the megawatts delivered under the contract must be provided by the specified generating facility. In such cases, the agreement is interrelated with the plant (because the plant’s cash inflows are generated by the power purchase agreement) and the cash flows relating to the agreement should be included in the impairment test. If the contract meets the definition of a derivative, certain additional considerations may be relevant.
If the agreement is a derivative that is being recorded at fair value, any above or below market cash flows are already measured in the fair value of the related derivative asset or liability. Therefore, if an impairment is recorded for the asset group, no portion of any impairment loss would be allocated to the derivative contract.
If the contract is designated in a hedge of a forecasted transaction (e.g., an all-in-one hedge of forecasted sales from the plant), ASC 815-30-35-42 requires that the related expected cash flows be excluded from the impairment analysis (see DH 7.3.7. In addition, as required by ASC 815-30-35-43, if an impairment loss is recognized for an asset (to which the forecasted transaction relates), any amounts previously deferred in accumulated other comprehensive income would be immediately released to the income statement.
Question UP 12-12
What would the cost basis be after an impairment loss is recognized?
What would the cost basis be after an impairment loss is recognized?
PwC response
ASC 360-10-35-20 states in part that “if an impairment loss is recognized, the adjusted carrying amount of a long-lived asset shall be its new cost basis.” The new cost basis is then depreciated over the remaining useful life of the asset. Additionally, the useful life of an asset should be periodically reassessed.
12.5.1.1 Application examples—determining the asset group for power plants
The following examples illustrate the factors to consider in determining asset groupings for power plants.
EXAMPLE UP 12-4
Determining the asset group for a group of power plants—interrelated operations
Determining the asset group for a group of power plants—interrelated operations
Ivy Power Producers owns numerous power plants located in the midwestern and northeastern United States, including nuclear, natural gas, renewable, and coal plants. The facilities are located in five independently operated control areas.
The plants in each control area are managed as a group of assets, including common hedging strategies, budgeting, dispatch decisions, and fuel management. Each of the five independently operated control areas conducts an annual auction for capacity. IPP bids the output from its plants into the annual capacity auctions on a portfolio basis for each control area. In this process, IPP includes a cushion/margin within its bid in a control area (due to severe penalties for failure to provide capacity under contract). Dispatch decisions are made based on multiple factors as follows:
- Economic dispatch — plants are operated based on the lowest costs taking into account current fuel prices and expected load (there is a cost to starting up individual plants)
- Operational needs — certain plants can be ramped up and down quickly to respond to fluctuations in demand while others are typically operated as base load units (operated continuously at a consistent level of output)
- Reliability — certain plants are needed to ensure the stability of the grid and to provide power where it is needed
As a result, certain plants operate infrequently and have minimal cash flows on a stand-alone basis. IPP does not measure or allocate revenues to any individual plant. Instead, revenues are recorded and performance is evaluated at the portfolio level for each control area.
What should IPP consider to be the asset groups?
Analysis
Based on the way the plants are managed and operated (i.e., for each control area), and the measurement and allocation of revenue on a control area basis, there would be five asset groups, composed of the plants in each control area.
EXAMPLE UP 12-5
Determining the asset group for a group of power plants—plant-specific contract
Determining the asset group for a group of power plants—plant-specific contract
Assume the same facts as in Example UP 12-4, except IPP has one renewable plant, the output of which is sold entirely under contract to Rosemary Electric & Gas Company, a regulated utility located in one of IPP’s control areas. The plant is in a remote location of the control area and IPP does not operate the plant as part of the overall dispatch of the system.
What should IPP consider to be the asset groups?
Analysis
Although the specific plant is located in the same control area as other IPP plants, it is directly contracted to a third party and not operated in connection with the other plants or relied upon for purposes of system reliability. Therefore, the renewable plant should be a separate asset group.
EXAMPLE UP 12-6
Determining the asset group for a group of power plants—revenue interdependencies due to a contractual relationship
Determining the asset group for a group of power plants—revenue interdependencies due to a contractual relationship
Ivy Power Producers owns five power plants in California. IPP has entered into a contract with the state to supply a specified amount of power and capacity, representing the majority of the output available from the five plants, to the state’s regulated utilities. Under the terms of the agreement, IPP is permitted to supply the power and capacity from any of its five power plants located in the state.
What should IPP consider to be the asset groups?
Analysis
The plants are operated under contract as a group. The revenues under the contract are interrelated and the cash flows from individual plants are not independent of each other. As a result, the five plants should be considered one asset group.
12.5.2 Long-lived assets held for sale
ASC 360-10-45-9 provides six criteria, all of which should be met, for a long-lived asset (disposal group) to be classified as held for sale. The classification of a long-lived asset held for sale has many implications, including a different measurement basis and separate presentation. In addition, if an asset (or asset group) is classified as held for sale, depreciation ceases, and a reporting entity should consider whether it has a discontinued operation.
One of the criteria for evaluating whether a long-lived asset should be classified as held for sale is the timing of the sale. Specifically, to qualify as held for sale, the sale of the asset (disposal group) must be probable and transfer of the asset (disposal group) must be expected to qualify for recognition as a completed sale within one year.
Excerpt from ASC 360-10-45-9(d)
The sale of the asset (disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale, within one year, except as permitted by paragraph 360-10-45-11.
As referenced above, ASC 360-10-45-11(a)-(c) grants certain exceptions to the one-year requirement as there may be events or circumstances beyond a reporting entity’s control that extend the period required to complete the sale. ASC 360-10-55-45 includes an example of a regulated utility requiring regulatory approval which could extend the period required to complete the sale beyond one year.
An entity in the utility industry commits to a plan to sell a disposal group that represents a significant portion of its regulated operations. The sale will require regulatory approval, which could extend the period required to complete the sale beyond one year. Actions necessary to obtain that approval cannot be initiated until after a buyer is known and a firm purchase commitment is obtained. However, a firm purchase commitment is probable within one year. In that situation, the conditions in paragraph 360-10-45-11(a) for an exception to the one-year requirement in paragraph 360-10-45-9(d) would be met.
The utility industry example in ASC 360-10-55-45 meets the conditions in ASC 360-10-45-11(a) for an exception to the one-year requirement. The same facts may apply to a potential sale by a regulated utility or other entity where regulatory approval is required. Further examples of exceptions to the one-year requirement are illustrated in ASC 360-10-55-44 through ASC 360-10-55-49 and discussed in further detail in PPE 5.3.7.
12.5.3 Insurance recoveries
A power plant or renewable energy facility may become impaired as the result of damage for which it has insurance and expects recovery of any losses incurred, including potential recoveries in excess of losses incurred as well as business interruption insurance recoveries. Refer to PPE 8.2, FSP 23.4, and FSP 23.5 for guidance on accounting for insurance recoveries and loss contingencies and gain contingencies. Refer also to FSP 23 for related guidance on presentation and disclosure of such amounts.
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