How is a long-lived asset impairment test performed step by step under ASC 360?

Under ASC 360-10, a long-lived asset (or asset group) held and used is impaired when its carrying amount exceeds its fair value, but only after a two-step process first confirms that the carrying amount is not recoverable from undiscounted future cash flows. The ASC 360 Long-Lived Asset Impairment Test is a sequential, two-step process triggered by the presence of impairment indicators — it is not a required annual test like goodwill under ASC 350. - Step 0 — Triggering event assessment: ASC 360-10-35-21 requires management to assess whether events or changes in circumstances indicate the carrying amount may not be recoverable. Indicators include a significant decline in market price, adverse changes in legal environment, physical damage, or a history of operating losses at the asset group level. - Step 1 — Recoverability test (undiscounted cash flows): Per ASC 360-10-35-17, compare the carrying amount of the asset or asset group to the sum of undiscounted expected future cash flows it will generate plus its residual value. If carrying amount ≤ undiscounted cash flows → no impairment recognized. If carrying amount > undiscounted cash flows → proceed to Step 2. Note: this test uses undiscounted cash flows, not fair value — a critical distinction. - Step 2 — Measurement of impairment loss: Under ASC 360-10-35-17, the impairment loss equals the excess of the carrying amount over fair value. Fair value is determined using ASC 820 hierarchy — Level 1 quoted prices preferred, Level 3 discounted cash flow (DCF) models most common in practice. The loss is recognized in income from continuing operations.

How do you determine the appropriate asset grouping level under ASC 360-10-35-23 when assets share infrastructure but generate partially separate revenue streams?

- Asset group determination: ASC 360-10-35-23 requires assets to be grouped at the lowest level for which identifiable cash flows are largely independent of other groups. Asset group composition directly affects both the recoverability test and loss allocation — getting this wrong is a frequent audit trap. - Allocation of impairment loss: Per ASC 360-10-35-28, the impairment loss is allocated pro-rata to the long-lived assets within the group based on their relative carrying amounts, but no individual asset's carrying amount may be reduced below its fair value (if determinable) or below zero. - Assets held for sale: Once classified as held for sale under ASC 360-10-45-9, the two-step model no longer applies. The asset is measured at the lower of carrying amount or fair value less costs to sell, and depreciation ceases immediately. A manufacturing company has an asset group (machinery + building) with a combined carrying amount of $5,000,000. A triggering event occurs. Management's best estimate of undiscounted future cash flows is $4,600,000 — failing the recoverability test. DCF analysis yields a fair value of $3,800,000. Impairment loss = $5,000,000 − $3,800,000 = $1,200,000

Under ASC 360, how should a company incorporate probability-weighted vs. best-estimate cash flow scenarios when building the undiscounted cash flow model for Step 1?

Allocation between machinery (carrying $3,000,000; 60%) and building (carrying $2,000,000; 40%): | Asset | Carrying Amount | Allocation % | Loss Allocated | New Carrying Amount | |---|---|---|---|---| | Machinery | $3,000,000 | 60% | $720,000 | $2,280,000 | | Building | $2,000,000 | 40% | $480,000 | $1,520,000 | | Total | $5,000,000 | | $1,200,000 | $3,800,000 | | Account | Dr | Cr | |---|---|---| | Impairment Loss — Asset Group | $1,200,000 | | | Accumulated Impairment — Machinery | | $720,000 | | Accumulated Impairment — Building | | $480,000 | Importantly, impairment losses on assets held and used cannot be reversed under US GAAP (unlike IFRS per IAS 36). - Using discounted cash flows in Step 1: The recoverability test explicitly requires undiscounted cash flows (ASC 360-10-35-17). Using DCF in Step 1 inappropriately fails more assets into Step 2 and overstates impairment frequency — a common audit finding.

If an asset group fails the recoverability test but includes both depreciable long-lived assets and working capital, how is the impairment loss allocated across asset types?

- Incorrect asset group definition: Grouping assets too broadly can mask impairment by allowing strong-performing assets to subsidize impaired ones. Auditors scrutinize whether cash flows are truly "largely independent" at the selected grouping level per ASC 360-10-35-23. - Ignoring triggering events between reporting periods: ASC 360-10-35-21 requires continuous assessment, not just annual review. Missing an intra-period triggering event (e.g., a customer contract cancellation mid-quarter) is a material weakness risk. - ASC 360-10-35-17 — Core two-step impairment model: recoverability test using undiscounted cash flows, then fair value measurement - ASC 360-10-35-21 — Triggering events / impairment indicators requiring assessment - ASC 360-10-35-23 — Asset group identification: lowest level with largely independent cash flows - ASC 360-10-35-28 — Pro-rata allocation of impairment loss to assets within the group - ASC 360-10-45-9 — Classification criteria and measurement for assets held for sale

ASC 360 Long-Lived Asset Impairment Test

ASC 360 Long-Lived Asset Impairment Test — Core Rule

Under ASC 360-10, a long-lived asset (or asset group) held and used is impaired when its carrying amount exceeds its fair value, but only after a two-step process first confirms that the carrying amount is not recoverable from undiscounted future cash flows.

How ASC 360 Long-Lived Asset Impairment Test Works

The ASC 360 Long-Lived Asset Impairment Test is a sequential, two-step process triggered by the presence of impairment indicators — it is not a required annual test like goodwill under ASC 350.

Step 0 — Triggering event assessment: ASC 360-10-35-21 requires management to assess whether events or changes in circumstances indicate the carrying amount may not be recoverable. Indicators include a significant decline in market price, adverse changes in legal environment, physical damage, or a history of operating losses at the asset group level.

Step 1 — Recoverability test (undiscounted cash flows): Per ASC 360-10-35-17, compare the carrying amount of the asset or asset group to the sum of undiscounted expected future cash flows it will generate plus its residual value. If carrying amount ≤ undiscounted cash flows → no impairment recognized. If carrying amount > undiscounted cash flows → proceed to Step 2. Note: this test uses undiscounted cash flows, not fair value — a critical distinction.

Step 2 — Measurement of impairment loss: Under ASC 360-10-35-17, the impairment loss equals the excess of the carrying amount over fair value. Fair value is determined using ASC 820 hierarchy — Level 1 quoted prices preferred, Level 3 discounted cash flow (DCF) models most common in practice. The loss is recognized in income from continuing operations.

Asset group determination: ASC 360-10-35-23 requires assets to be grouped at the lowest level for which identifiable cash flows are largely independent of other groups. Asset group composition directly affects both the recoverability test and loss allocation — getting this wrong is a frequent audit trap.

Allocation of impairment loss: Per ASC 360-10-35-28, the impairment loss is allocated pro-rata to the long-lived assets within the group based on their relative carrying amounts, but no individual asset's carrying amount may be reduced below its fair value (if determinable) or below zero.

Assets held for sale: Once classified as held for sale under ASC 360-10-45-9, the two-step model no longer applies. The asset is measured at the lower of carrying amount or fair value less costs to sell, and depreciation ceases immediately.

ASC 360 Long-Lived Asset Impairment Test — Practical Example

A manufacturing company has an asset group (machinery + building) with a combined carrying amount of $5,000,000. A triggering event occurs. Management's best estimate of undiscounted future cash flows is $4,600,000 — failing the recoverability test. DCF analysis yields a fair value of $3,800,000.

Impairment loss = $5,000,000 − $3,800,000 = $1,200,000

Allocation between machinery (carrying $3,000,000; 60%) and building (carrying $2,000,000; 40%):

Asset	Carrying Amount	Allocation %	Loss Allocated	New Carrying Amount
Machinery	$3,000,000	60%	$720,000	$2,280,000
Building	$2,000,000	40%	$480,000	$1,520,000
Total	$5,000,000		$1,200,000	$3,800,000

Journal entry at impairment recognition

Account	Dr	Cr
Impairment Loss — Asset Group	$1,200,000
Accumulated Impairment — Machinery		$720,000
Accumulated Impairment — Building		$480,000

Importantly, impairment losses on assets held and used cannot be reversed under US GAAP (unlike IFRS per IAS 36).

ASC 360 Long-Lived Asset Impairment Test — Common Pitfalls

Using discounted cash flows in Step 1: The recoverability test explicitly requires undiscounted cash flows (ASC 360-10-35-17). Using DCF in Step 1 inappropriately fails more assets into Step 2 and overstates impairment frequency — a common audit finding.

Incorrect asset group definition: Grouping assets too broadly can mask impairment by allowing strong-performing assets to subsidize impaired ones. Auditors scrutinize whether cash flows are truly "largely independent" at the selected grouping level per ASC 360-10-35-23.

Ignoring triggering events between reporting periods: ASC 360-10-35-21 requires continuous assessment, not just annual review. Missing an intra-period triggering event (e.g., a customer contract cancellation mid-quarter) is a material weakness risk.

ASC 360 Long-Lived Asset Impairment Test — Key Paragraphs

ASC 360-10-35-17 — Core two-step impairment model: recoverability test using undiscounted cash flows, then fair value measurement
ASC 360-10-35-21 — Triggering events / impairment indicators requiring assessment
ASC 360-10-35-23 — Asset group identification: lowest level with largely independent cash flows
ASC 360-10-35-28 — Pro-rata allocation of impairment loss to assets within the group
ASC 360-10-45-9 — Classification criteria and measurement for assets held for sale