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Asset Impairment Testing: 3 Steps for Avoiding Pitfalls Under ASC 360

by Whit Anderson

Companies should take precautions to avoid potential pitfalls when performing long-lived asset impairment testing under ASC 360.

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Accounting Standards Codification (ASC 360), Property, Plant and Equipment (“PP&E”) provides guidance with respect to impairment testing for a company’s long-lived assets such as property, plant, equipment and intangibles. ASC 360 prescribes a three-step trigger-based process for long-lived assets. The test for impairment under ASC 360 consists of the following steps:

  • Step 1: Identify an indicator of impairment via a triggering event. If triggering indicators are present, then Step 2 is performed.
  • Step 2: Test for recoverability using an undiscounted cash flow analysis on the asset group in question to estimate the asset group’s recoverable value and comparing the asset group’s recoverable value to its carrying value. If the recoverable value is below the carrying value, then Step 3 is performed.
  • Step 3: Perform a fair value analysis of the assets.

Step by Step

For purposes of Step 1, company management will typically identify an event or trigger has negatively impacted the business and the underlying group of assets – more specifically, when facts and circumstances indicate an asset grouping’s carrying value is not recoverable. Once there’s an indication of impairment under Step 1, then Step 2 and Step 3 should be performed. While it’s not mandatory for a company to utilize an outside appraisal professional, the use of a third-party certainly helps mitigate common pitfalls when performing in-house ASC 360 testing.

The most common such pitfall is performing the undiscounted cash flow analysis and then, upon determining that the recoverable value is less than the carrying value of the asset group, to simply estimate the fair value of the total asset group and then write down the value of the PP&E within the asset group on a pro rata basis and conclude the analysis. However, ASC 360 guidance indicates that the carrying amount of the PP&E shall not be reduced below its fair value. As a result, the PP&E and other long-lived assets, including intangible assets, should be valued discretely within Step 3 leveraging both ASC 360 and ASC 820 guidelines to determine fair value. 

In certain instances, a significant downturn in the market could indicate that the fair value of PP&E may be considered to be equivalent to auction value—since an active and transparent market in which the assets are being traded may no longer exist—and the only sales occurrences are at auctions indicating a liquidation value. In essence, the spirit of the accounting guidance is to consider what a market participant would pay in an orderly transaction given current market conditions.

In summary, companies should take precautions to ensure that they’re staying on top of potential triggering events when performing long-lived asset impairment testing under ASC 360. If it’s determined that a triggering event exists, then company management should ensure that a defensible and supportable measurement of this impairment is in place and follow all guidelines accordingly.

Whit Anderson is a Director in Opportune LLP’s Valuation practice.