Impairment testing of long-lived assets differs substantially from goodwill impairment testing. Learn the key differences and avoid common mistakes.
So far in 2021, Crowe specialists are reporting an uptick in client questions about impairment of long-lived assets such as customer relationships, real estate, or factory equipment – a topic that’s less familiar for many teams because it follows guidance under a different accounting standard (ASC 360) than goodwill impairment (ASC 350).
The following six questions shed some light on impairment testing for long-lived assets to be held and used and how it differs from the goodwill impairment model under ASC 350. (Our discussion here assumes the accounting alternative for goodwill impairment testing available to private companies is not elected.)
1. What are the key differences between impairment testing in ASC 350 and ASC 360?
Exhibit 1 summarizes some of the major differences between the goodwill impairment model under ASC 350 (Intangibles – Goodwill and Other) and the long-lived asset impairment model under ASC 360 (Property, Plant, and Equipment).
Exhibit 1: Comparing ASC 350 and ASC 360
2. What is the correct ordering of impairment testing for assets held for use?
Finance teams should conduct impairment testing in the following order:
- Assets not in the scope of ASC 350 and ASC 360, such as inventory and accounts receivable
- Indefinite-lived intangible assets (ASC 350-30)
- Long-lived assets (ASC 360)
- Goodwill (ASC 350)
3. When should an impairment test be performed for a long-lived asset?
Triggering events for an impairment test of long-lived assets should be performed if one of the following occurs:
- A significant decrease in the market price of an asset group
- A significant adverse change to the asset group – its physical condition, how it is used, or even overall business climate or legal factors – that affects its value
- An accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset group
- An operating or cash flow loss combined with a history of operating or cash flow losses – or a forecast that demonstrates continuing losses associated with the asset group
- An expectation that, more likely than not, an asset group will be sold or disposed of well before the end of its previously estimated useful life
4. How should organizations identify an asset group for for long-lived asset impairment testing under ASC 360?
An asset group is comprised of assets and liabilities organized at the lowest level of identifiable cash flows that are largely independent of other assets and liabilities. Asset groups are not limited to tangible assets; they may also include intangible assets. If an asset group is equivalent to a reporting unit as a whole, then it also should include goodwill.
The determination of asset groups is inherently entity-specific because it is driven by the level at which cash flows are largely independent from the cash flows of other assets and liabilities within an organization. As a result, finance teams should consider their specific facts and circumstances to identify asset groups, which might involve significant judgment.
5. To avoid errors, what do organizations need to understand about the difference between ASC 350’s quantitative testing approach and ASC 360’s two-step approach?
Exhibit 2 summarizes some of the major differences between measurement requirements under ASC 350 and ASC 360.
Exhibit 2: Comparing measurement requirements of ASC 350 and ASC 360
6. What other considerations should organizations take into account when performing impairment testing for long-lived assets?
- Cash flow forecasts must be based on the asset group as it is currently constituted rather than on speculative future changes that could improve cash flows. Auditors will expect reasonable forecasts.
- Probability-weighted cash flows might be useful if management is considering various scenarios for the asset group during the recoverability test.
- Long-lived assets that are held for sale are assessed differently from long-lived assets held for use (for example, the order in which they are tested for impairment).
- Measurement of impairment is performed at the asset group level; however, the impairment loss must then be allocated to the individual assets in the group on a pro rata basis.