How is long-lived asset impairment tested under ASC 360?

Long-lived assets (including property, plant, and equipment) must be tested for impairment whenever triggering events indicate the carrying value may not be recoverable; if the undiscounted future cash flows from the asset are less than its carrying amount, an impairment loss is recognized measured as the excess of carrying value over fair value (ASC 360-10-35-17). - Triggering events require assessment. An entity must evaluate whether events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable (ASC 360-10-35-21). Common triggers include significant underperformance, adverse changes in market conditions, technological obsolescence, loss of a major customer, regulatory changes, or idle asset status. The assessment is largely qualitative; no threshold dollar amount or percentage decline automatically triggers testing. - Two-step recoverability test. Step 1: Compare the asset's carrying amount to the sum of undiscounted (not discounted) future cash flows expected from use and eventual disposal (ASC 360-10-35-17). These cash flows must be asset-specific and cover the remaining useful life. If undiscounted cash flows exceed carrying value, no impairment exists and testing stops. If undiscounted cash flows are less than carrying value, proceed to Step 2. - Fair value measurement in Step 2. Once recoverability fails, measure the impairment loss as the difference between the asset's carrying amount and its fair value (ASC 360-10-35-29). Fair value is typically determined using quoted market prices, comparable transactions, or discounted cash flows (using a probability-weighted, risk-adjusted discount rate). Unlike the recoverability step, fair value measurement requires present value of future cash flows.

How do you determine the appropriate discount rate for fair value measurement under ASC 360-10-35-29, and what is the difference from WACC?

- Asset grouping is critical. Test for impairment at the lowest level of identifiable cash flows, typically an individual asset or asset group (ASC 360-10-35-23). Grouping must reflect how the entity uses the asset; cash flows must be largely independent. This is a judgment area where auditors frequently challenge the appropriate grouping level. - Presentation and reversal restrictions. Impairment losses are recognized as operating losses (often in cost of goods sold or SG&A depending on asset type) in the period the loss is identified (ASC 360-10-45-2). Critically, under US GAAP, impairment losses on long-lived assets cannot be reversed in subsequent periods, even if fair value recovers (ASC 360-10-35-33). This differs materially from IFRS (IAS 36), which permits reversals. - Disclosure obligations. For significant impairments, disclose the facts and circumstances leading to the impairment, the asset(s) or asset group involved, the amount of the loss, and how fair value was determined (ASC 360-10-50-3). If the impairment is material, consider segment disclosure implications under ASC 280. Scenario: A manufacturing company owns specialized equipment with a carrying value of $2,500,000 and a remaining useful life of 8 years. A major customer representing 65% of revenue terminated its contract unexpectedly. Management projects annual cash inflows will decline from $400,000 to $150,000 for the remaining 8 years, plus a salvage value of $100,000.

When asset grouping includes both impaired and non-impaired assets, how do you allocate the fair value loss across components per ASC 360-10-35-29?

Step 1—Recoverability Test (Undiscounted Cash Flows): - Projected annual cash flows: $150,000 × 8 years = $1,200,000 - Salvage value: $100,000 - Total undiscounted cash flows: $1,300,000 - Carrying amount: $2,500,000 - Result: $1,300,000 < $2,500,000 → Recoverability test fails; proceed to Step 2. Step 2—Fair Value Measurement (Discounted): Using a 12% discount rate (risk-adjusted for the asset-specific environment): - PV of $150,000 annual inflows: $150,000 × 4.968 = $745,200 - PV of $100,000 salvage in Year 8: $100,000 × 0.404 = $40,400 - Fair value = $785,600 - Impairment loss = $2,500,000 − $785,600 = $1,714,400 Journal Entry: ``` Dr. Loss on Asset Impairment $1,714,400 Cr. Accumulated Depreciation—Equipment $1,714,400 (To record impairment of manufacturing equipment) ``` The equipment is now carried at $785,600 net of the accumulated depreciation adjustment.

If an entity tests for impairment mid-year, records a loss, then the asset recovers in value by year-end, must the loss be reversed or must it remain under US GAAP?

- Confusing undiscounted vs. discounted cash flows. The recoverability test uses undiscounted cash flows to provide a conservative screen; fair value measurement requires discounting. Using discounted cash flows in Step 1 understates the recoverability hurdle and may miss impairments. Conversely, using undiscounted flows in Step 2 overstates fair value and understates loss recognition. - Inappropriate asset grouping. Grouping an impaired asset with performing assets to avoid recognition is a common audit finding. ASC 360-10-35-23 requires the lowest level of identifiable cash flows; management must justify grouping with evidence that cash flows are interdependent and the entity cannot recover that specific asset's carrying amount separately. - Ignoring triggering events or testing only annually. Impairment testing must be performed whenever a triggering event occurs, not just annually (ASC 360-10-35-21). Entities that wait for year-end testing miss interim impairment signals and delay loss recognition, understating period-end reserves and overstating earnings. - ASC 360-10-35-17 — Recoverability test definition and two-step process - ASC 360-10-35-21 — Triggering event assessment requirements - ASC 360-10-35-23 — Asset grouping and lowest level of identifiable cash flows - ASC 360-10-35-29 — Fair value measurement of impairment loss - ASC 360-10-35-33 — No reversal of impairment losses (key US GAAP restriction) - ASC 360-10-50-3 — Disclosure requirements for impairment losses

ASC 360 Property, Plant & Equipment

ASC 360 Property, Plant and Equipment — Core Rule

Long-lived assets (including property, plant, and equipment) must be tested for impairment whenever triggering events indicate the carrying value may not be recoverable; if the undiscounted future cash flows from the asset are less than its carrying amount, an impairment loss is recognized measured as the excess of carrying value over fair value (ASC 360-10-35-17).

How ASC 360 Property, Plant and Equipment Works

Triggering events require assessment. An entity must evaluate whether events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable (ASC 360-10-35-21). Common triggers include significant underperformance, adverse changes in market conditions, technological obsolescence, loss of a major customer, regulatory changes, or idle asset status. The assessment is largely qualitative; no threshold dollar amount or percentage decline automatically triggers testing.

Two-step recoverability test. Step 1: Compare the asset's carrying amount to the sum of undiscounted (not discounted) future cash flows expected from use and eventual disposal (ASC 360-10-35-17). These cash flows must be asset-specific and cover the remaining useful life. If undiscounted cash flows exceed carrying value, no impairment exists and testing stops. If undiscounted cash flows are less than carrying value, proceed to Step 2.

Fair value measurement in Step 2. Once recoverability fails, measure the impairment loss as the difference between the asset's carrying amount and its fair value (ASC 360-10-35-29). Fair value is typically determined using quoted market prices, comparable transactions, or discounted cash flows (using a probability-weighted, risk-adjusted discount rate). Unlike the recoverability step, fair value measurement requires present value of future cash flows.

Asset grouping is critical. Test for impairment at the lowest level of identifiable cash flows, typically an individual asset or asset group (ASC 360-10-35-23). Grouping must reflect how the entity uses the asset; cash flows must be largely independent. This is a judgment area where auditors frequently challenge the appropriate grouping level.

Presentation and reversal restrictions. Impairment losses are recognized as operating losses (often in cost of goods sold or SG&A depending on asset type) in the period the loss is identified (ASC 360-10-45-2). Critically, under US GAAP, impairment losses on long-lived assets cannot be reversed in subsequent periods, even if fair value recovers (ASC 360-10-35-33). This differs materially from IFRS (IAS 36), which permits reversals.

Disclosure obligations. For significant impairments, disclose the facts and circumstances leading to the impairment, the asset(s) or asset group involved, the amount of the loss, and how fair value was determined (ASC 360-10-50-3). If the impairment is material, consider segment disclosure implications under ASC 280.

ASC 360 Property, Plant and Equipment — Practical Example

Scenario: A manufacturing company owns specialized equipment with a carrying value of $2,500,000 and a remaining useful life of 8 years. A major customer representing 65% of revenue terminated its contract unexpectedly. Management projects annual cash inflows will decline from $400,000 to $150,000 for the remaining 8 years, plus a salvage value of $100,000.

Step 1—Recoverability Test (Undiscounted Cash Flows)

Projected annual cash flows: $150,000 × 8 years = $1,200,000
Salvage value: $100,000
Total undiscounted cash flows: $1,300,000
Carrying amount: $2,500,000
Result: $1,300,000 < $2,500,000 → Recoverability test fails; proceed to Step 2.

Step 2—Fair Value Measurement (Discounted)

Using a 12% discount rate (risk-adjusted for the asset-specific environment):

PV of $150,000 annual inflows: $150,000 × 4.968 = $745,200
PV of $100,000 salvage in Year 8: $100,000 × 0.404 = $40,400
Fair value = $785,600
Impairment loss = $2,500,000 − $785,600 = $1,714,400

Journal Entry

Dr. Loss on Asset Impairment          $1,714,400
  Cr. Accumulated Depreciation—Equipment            $1,714,400
(To record impairment of manufacturing equipment)

The equipment is now carried at $785,600 net of the accumulated depreciation adjustment.

ASC 360 Property, Plant and Equipment — Common Pitfalls

Confusing undiscounted vs. discounted cash flows. The recoverability test uses undiscounted cash flows to provide a conservative screen; fair value measurement requires discounting. Using discounted cash flows in Step 1 understates the recoverability hurdle and may miss impairments. Conversely, using undiscounted flows in Step 2 overstates fair value and understates loss recognition.

Inappropriate asset grouping. Grouping an impaired asset with performing assets to avoid recognition is a common audit finding. ASC 360-10-35-23 requires the lowest level of identifiable cash flows; management must justify grouping with evidence that cash flows are interdependent and the entity cannot recover that specific asset's carrying amount separately.

Ignoring triggering events or testing only annually. Impairment testing must be performed whenever a triggering event occurs, not just annually (ASC 360-10-35-21). Entities that wait for year-end testing miss interim impairment signals and delay loss recognition, understating period-end reserves and overstating earnings.

ASC 360 Property, Plant and Equipment — Key Paragraphs

ASC 360-10-35-17 — Recoverability test definition and two-step process
ASC 360-10-35-21 — Triggering event assessment requirements
ASC 360-10-35-23 — Asset grouping and lowest level of identifiable cash flows
ASC 360-10-35-29 — Fair value measurement of impairment loss
ASC 360-10-35-33 — No reversal of impairment losses (key US GAAP restriction)
ASC 360-10-50-3 — Disclosure requirements for impairment losses