Accounting for Asset Impairment Indicators and Recoverability Testing

✦ Asset impairment accounting ensures that long-lived assets are not carried on the balance sheet at amounts exceeding their recoverable value.

✦ Entities must monitor for indicators of impairment and perform recoverability testing when such indicators are present.

✦ Under ASC 360, impairment is assessed at the asset group level using undiscounted cash flows before measuring the loss.

✦ Proper application involves identifying triggering events, grouping assets correctly, and presenting and disclosing impairment losses appropriately.

Let’s explore the step-by-step accounting for long-lived asset impairment under US GAAP, including indicators, testing, measurement, and journal entries.

1. Scope of Impairment Testing Under ASC 360

✦ Applies to long-lived assets held and used, including: • Property, plant, and equipment (PPE) • Intangible assets with finite lives • Leasehold improvements • Asset groups used in operations

✦ Does not apply to goodwill, indefinite-lived intangibles, or financial assets (these are covered by ASC 350 and ASC 326).

✦ Trigger-based model: Impairment testing is not automatic, but occurs only when indicators of impairment arise.

2. Impairment Indicators (Triggering Events)

Entities must evaluate impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable.

✦ Common indicators include:

• ✦ Significant decrease in market value of the asset• ✦ Adverse changes in use, legal environment, or economic conditions• ✦ Costs significantly exceeding budgeted amounts• ✦ Accumulated operating or cash flow losses• ✦ Plans to dispose of or abandon the asset• ✦ Decline in utilization or physical condition of the asset

Entities must document the triggering event and proceed with recoverability testing if needed.

3. Asset Grouping for Testing

✦ Assets must be tested at the lowest level of identifiable cash flows—typically the asset group level, not individual assets.

✦ A group may include: • Machinery + building + leasehold improvements • A store or retail location • A production line

✦ Assets must be used together and generate cash flows that are largely independent from other groups.

4. Step 1: Recoverability Test

✦ Under ASC 360-10-35-17, compare the undiscounted future cash flows of the asset group to its carrying amount.

✦ If undiscounted cash flows ≥ carrying amount, no impairment is recognized.

✦ If undiscounted cash flows < carrying amount, proceed to Step 2.

Example:• Carrying amount = $5 million• Undiscounted expected future cash flows = $4.2 million→ Impairment test fails → proceed to fair value measurement

5. Step 2: Measurement of Impairment Loss

✦ Impairment loss = Carrying amount – Fair value

✦ Fair value is usually determined using: • Market prices (if available) • Discounted cash flow (DCF) models • Appraisals or cost-based techniques

Example:• Carrying amount = $5 million• Fair value = $3.8 million→ Impairment loss = $1.2

million

6. Journal Entry for Impairment Loss

 Dr. Impairment Loss – $1.2 million  Cr. Accumulated Impairment / Asset – $1.2 million

✦ Loss appears in the income statement under operating expenses.

✦ Adjusted carrying amount becomes new cost basis; depreciation is revised prospectively.

7. Subsequent Depreciation and Reassessment

✦ No reversal of impairment loss is permitted under US GAAP.

✦ Future depreciation is based on the new adjusted carrying amount, over the remaining useful life.

✦ Reassess impairment indicators at each reporting period.

8. Presentation and Disclosure Requirements

✦ Disclose in notes: • Description of impaired asset group • Nature and facts of impairment event • Amount of loss and where it appears in income statement • Method for determining fair value (e.g., DCF, market data) • Any significant assumptions used

✦ Required for both interim and annual periods where impairment occurs.

9. Differences with IFRS

Feature	US GAAP (ASC 360)	IFRS (IAS 36)
Step 1 basis	Undiscounted cash flows	Discounted cash flows
Reversals of impairment	Not allowed	Allowed under certain conditions
Impairment unit	Asset group (lowest cash flow level)	Cash-generating unit (CGU)
Measurement	Fair value less cost to sell or DCF	Higher of value in use or fair value

10. Common Mistakes to Avoid

✦ Failing to assess impairment on a timely basis when triggers exist✦ Testing individual assets instead of asset groups✦ Using discounted cash flows for Step 1 (incorrect under GAAP)✦ Not updating depreciation schedules after impairment✦ Missing required disclosures in footnotes