Asset impairment is often overlooked. Yet, understanding and addressing asset impairment is crucial, especially when facing uncertain economic times, rising interest rates or inflation.
By understanding the triggers, assessment process and implications of impairment, you can make informed decisions about your property, plant and equipment.
Impairment loss accounting
When we think of impairment, goodwill often comes to mind, but asset impairment extends beyond intangible assets.
Have you ever purchased a piece of machinery and subsequently evaluated how likely you are to see a return on your investment? That machine is likely impaired and subject to remeasurement. Additionally, inflation may increase labor costs associated with operating that machine, potentially reducing expected net cash inflows to below the carrying amount.
This additional consideration could be referred to as a triggering event, with the potential conclusion that your property, plant and equipment is impaired.
Under FASB Codification Topic 360, long-lived assets — which include property, plant and equipment — should be evaluated at the asset group level using the primary asset of the asset group. An asset group represents “the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.”
Assessing long-lived assets’ impairment follows a two-step process upon a triggering event. First, you evaluate the recoverability of the asset group, then you assess if the fair value of the asset group is below the carrying value.
A triggering event is typically defined as a change in facts and circumstances that could lead to an asset group’s carrying amount not being recoverable. And a triggering event is considered a sign of impairment.
ASC 360-10-35-21 provides some examples of triggering events:
- A significant decrease in the market price of a long-lived asset (asset group)
- A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition
- A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator
- An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group)
- A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group)
- A current expectation that, more likely than not (a level of likelihood that is more than 50%), a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life
These events all point toward changes in circumstances that could hinder generating returns on your long-lived assets that are held and used.
Another key event to emphasize as you assess your own asset groups for impairment is whether “a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset” exists.
To assess the recoverability of an asset group, you must evaluate if the undiscounted cash flows associated with the use and disposal of that asset group are greater or less than the carrying amount.
The amount of undiscounted cash flows associated with the use and disposal of the asset group should consider the following:
- Cash inflows expected over the remaining useful life based on the asset group's existing service potential (excluding future improvements that would increase the remaining useful life).
- Cash outflows to obtain the expected cash flows. This would include any normal repair and maintenance expenses.
- Cash inflows or outflows associated with the disposal or sale of the asset group.
When determining the cash flows associated with the asset group, you should only include facts and circumstances as of the date of the triggering event. Your measurement should exclude any subsequently discovered facts and use other information that would be used in comparable periods, including budgets and projections.
If the resulting undiscounted cash flows are less than the carrying amount of the asset group, that asset group would fail the recoverability test and be subject to an impairment charge.
Recording impairment loss
If the asset group fails the recoverability test, the impairment loss would be recorded as the amount that the carrying value exceeds the fair value. If the asset group passes the recoverability test, no impairment loss is recorded, even if the carrying value exceeds the fair value.
The resulting impairment loss should be recorded upon the triggering event as a period cost. Additionally, you should adjust your depreciation estimates to reflect the reduced carrying amount of the asset group.
How Wipfli can help
Improve the accuracy of your financial reporting with Wipfli. Our audit and accounting team is ready to help your business turn routine financial compliance into actionable insights. Contact us today and learn how we can help you build a strong foundation for your financial decision-making.
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