The company controller, Barry Melrose, has asked for your help in interpreting t
ID: 2601545 • Letter: T
Question
The company controller, Barry Melrose, has asked for your help in interpreting the authoritative accounting liter- ature that addresses the recognition and measurement of impairment losses for property, plant, and equipment and intangible assets. "We have a significant amount of goodwill on our books from last year's acquisition of Chur- chill Corporation. Also, I think we may have a problem with the assets of some of our factories out West. And one of our divisions is currently considering disposing of a large group of depreciable assets." Your task as assistant controller is to research the issue. Required: 1. Obtain the relevant authoritative literature on accounting for the impairment of property, plant, and equip- ment and intangible assets using the FASB Accounting Standards Codification. You might gain access at the FASB website (www.fasb.org). Cite the reference locations regarding impairment of property, plant, and equipment and intangible assets. 2. When should property, plant, and equipment and finite-life intangible assets be tested for impairment? 3. Explain the process for measuring an impairment loss for property, plant, and equipment and finite-life intan- gible assets to be held and used. 4. What are the specific criteria that must be met for an asset or asset group to be classified as held-for-sale? What is the specific citation reference from the FASB Accounting Standards Codification that contains these criteria? 5. Explain the process for measuring an impairment loss for property, plant, and equipment and finite-life intan- gible assets classified as held-for-sale.Explanation / Answer
1) ASC 360-10, Impairment and disposal of long lived assets, provides accounting guidance for assets that are held for use, held for sale and to be disposed of by other means.
The impairment or disposal of long lived asset subsections provide guidance for:
a.)Recognition and measurement of the impairment of long lived assets to be held and used.
b.) Measurement of long lived asset to be disposed of by sale.
2) A long lived asset (group) that is held and used must be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of long lived asset might not be recoverable (i.e. information indicate that impairment might exist). Entities would assess the need for impairment write down only if an indicator of impairment is present (e.g., a significant decrease in the market value of a long lived asset is present.)
3) There are three steps involved in identifying, recognizing and measuring the impairment of long lived asset to be held and used mentioned as follows:-
i) Indicators of impairment : Consider whether indicators of impairment are present.
ii) Test for recoverability : If indicators are present, perform a recoverability test by comparing the sum of the estimated undisconted future cash flows attributable to the asset (group) in question to its carrying amount.
iii) Measurement of an impairment : If the undiscounted cash flows used in the test for recoverability are less than the long lived asset's carrying amount, determine the fair value of the long lived asset (group) and recognize an impairment of loss if the carrying amount of the long lived asset (group) exceeds its fair value.
4) Specific criteria that must be met for an asset or asset group to be classified as held for sale:-
a) Management commits to a plan to sell the asset (disposal group).
b) The asset is available for imediate sale in its present condition subject only to terms that are usual and customary for sale of such assets.
c) An active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated.
d) The sale of the asset is probable, and the transfer of the asset is expected to qualify for recognition as a completed sale, within one year.
e) The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value.
f) Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that plan will be withdrawn.
5) A long lived asset classified as held for sale shall be measued at the lower of its carrying amount or fair value less cost to sell. A loss shall be recognized for any initial or subsequent write down to fair value less cost to sell.