Impairing Long-Lived Assets (for Public and Private Entities)

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External factors outside a company’s control very often make it difficult to estimate fair market values or depreciation rates of their long-lived assets. These factors include inflation, interest rate moves, sudden changes in customer behavior … to name a few. It’s important to consider, however, how these influences affect cash flow and fair market values when assessing and reporting asset impairments.

Within the scope of Accounting Standards Codification (ASC) 360 – Property, Plant and Equipment, long-lived assets are accounted for and tested for impairment differently depending on the entity’s intent regarding the assets.

This article covers how an entity should assess impairment of its long-lived assets held and used under ASC 360. Although these assets are expensed over time, it is still critical to understand and account for the true economic reality of the specific asset and timely account for any impairment for stakeholders of financial statements.

Below, we discuss best practices and key points that will help you accurately assess the value of an entity’s long-lived assets subject to impairment.

Long-lived Assets: Defined

Long-lived assets are defined as assets like property, plant and equipment that have a particular useful life over one year and are depreciated. These assets are grouped into a separate category — thus guided by a separate ASC — considering their net book value is being depreciated over time, which simulates a real-time view of their fair value. 

Events Triggering Impairment

Impairment assessments for this type of asset are evaluated based on a triggering event. It is crucial to understand the definition of a triggering event so you can properly identify one when it occurs. A triggering event refers to a specific circumstance, event or a change in circumstances that indicates the carrying amount of an asset may no longer be recoverable (asset fair value may be less than its carrying value). Below are some common examples of triggering events:

Testing Impairment

When a triggering event occurs, a test of impairment is now required under U.S. Generally Accepted Accounting Principles (GAAP), with certain required steps.

• Determine Asset Groups: An asset group is defined as the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The entity should conduct an assessment of their cash flow and evaluate which cash flows are independent from each other. Although there is judgment involved, there should be a clearly defined asset grouping supported by evidence from the entity.
  • An example would be an entity that has a headquarters, four retail stores and two manufacturing centers. Based on the entity’s analysis, they may determine that each location is its own unique asset group and will assess the cash flow independently of the relative asset values.
  • Please note that asset groups must include all assets and liabilities directly associated with the group’s operations and are not just reliant on physical locations.
    
    
• Perform a Recoverability Test: If management has determined there was a triggering event and has also clearly defined and segregated the asset group carrying values, it is now time to perform a recoverability test. A recoverability test for long-lived assets requires an undiscounted cash flow to be performed to assess impairment. Even if the fair value is known, an undiscounted cash flow analysis is required.
  • An undiscounted cash flow is a simplistic way of calculating asset value, as it takes the estimated sum of cash inflows and outflows over the useful life of the asset and does not adjust for the time value of money.
  • It should be noted that the undiscounted cash flow should be realistic and supported, utilizing historical, current and realistic future information/expectations.
    
    
• Determine Fair Value and Impairment Loss: If the undiscounted cash flow determines that the recoverable value is less than the current carrying value, fair value must now be determined. Using frameworks allowed under ASC 820 – Fair Value Measurement, determine the proper fair value and, in turn, determine the impairment loss.
  • There are various applicable methods that could be utilized, which include market-based evidence (bona fide and arms-length transactions within the industry that could be a valid reference point for true fair value), valuation techniques (market, income and cost-based approaches) and discounted cash flows. These valuations should incorporate market participant assumptions, with all key inputs and judgments properly documented and supported.
    
    
• Note About Impairment Losses: Please note that it is possible for an undiscounted cash flow analysis for recoverability to show an impairment loss is needed, while the subsequent fair value analysis shows other indicators supporting no impairment being necessary.
  • The recoverability test is simply a screening mechanism to determine if an impairment loss may be necessary but does not calculate the loss itself. Impairment losses are only recognized when the fair value is less than the carrying value.
  • This situation can occur if undiscounted cash flows are low due to timing or conservatism, but the market-based valuation supports a higher fair value. As such, careful consideration of each step is required to perform an accurate analysis.
  • Additionally, under the impairment testing process, if the fair value is larger than the carrying value, no entry is recorded, as long-lived assets generally cannot be grossed upward under U.S. GAAP, unless specifically required by another standard (e.g., a business combination under ASC 805).
    
    
• Record the Impairment Loss: The final steps are to record the impairment loss based on the above information and properly disclose the impairment within the financial statements as required by U.S. GAAP.
  • Management should ensure disclosures include the facts and circumstances leading to the impairment, the amount of total loss, identification of the caption in the income statement where the loss is located and the method utilized to determine fair value.
  • Disclosure should also include the nature and description of the asset group, along with any assumptions utilized to determine fair value.

Adopt a Disciplined Approach

Hopefully you now have a better understanding of the process of assessing impairment for long-lived assets, along with a knowledge of its importance to the integrity of the financial statements. By identifying an entity’s triggering events early, grouping assets appropriately and applying a supported and disciplined approach to determining the overall impairment loss, entities can provide stakeholders with transparent and usable information.

PKF O’Connor Davies brings the technical knowledge and expertise needed to assist you in navigating the process of identifying triggering events, advising on asset grouping strategies and supporting the development of robust valuation models. Our goal is to ensure your impairment assessments are not only technically sound but also aligned with your broader financial reporting objectives.

Additional Resources

This article was published along with two others that also discuss impairment of goodwill and other assets. We encourage you to reference or share as needed:

• Public Companies: Impairing Goodwill and Indefinite-Lived Assets
• Private Companies: Impairing Goodwill and Indefinite-Lived Assets

Contact Us

We welcome the opportunity to answer any questions you may have related to this topic or any other matters concerning accounting and assurance. Please contact your PKF O’Connor Davies client service team or either of the Accounting and Assurance team members and authors below:

Jonathan Zuckerman, CPA
Partner
Accounting & Assurance
jzuckerman@pkfod.com | 646.699.2842

Kenneth Sumsky, CPA, CISA
Director
Accounting & Assurance
ksumsky@pkfod.com | 332.910.7951