Chapter 2 — Definitions of Discontinued Operation and Component of an Entity

2.5 Measurement of an Impairment Loss

ASC 360-10

Measurement of an Impairment Loss

35-17 An impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment shall be based on the carrying amount of the asset (asset group) at the date it is tested for recoverability, whether in use (see paragraph 360-10-35-33) or under development (see paragraph 360-10-35-34). An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value.

ASC 360-10 defines impairment as “the condition that exists when the carrying amount of a long-lived asset (asset group) exceeds its fair value.” When an entity determines that the carrying amount of the asset group is not recoverable because the undiscounted cash flows used in the recoverability test are less than its carrying amount, an impairment loss is measured as the amount by which the carrying amount exceeds fair value. An impairment loss is allocated to the long-lived assets within the scope of ASC 360-10 “on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group shall not reduce the carrying amount of that asset below its fair value whenever that fair value is determinable without undue cost and effort.”

Bridging the GAAP

Under IAS 36, if impairment indicators exist, an entity applies a one-step approach in calculating a CGU impairment. That is, the amount by which the carrying value of the asset or CGU exceeds the recoverable amount is recorded as an impairment loss. The recoverable amount for impairment (whether property, plant, and equipment [PP&E]; intangibles; or goodwill) is defined as the greater of:

The asset’s or CGU’s fair value less costs to sell.
The sum of future discounted cash flows, including the disposal value (also referred to as the value in use).

2.5.1 Determining the Fair Value of an Asset Group

ASC 360-10

35-36 For long-lived assets (asset groups) that have uncertainties both in timing and amount, an expected present value technique will often be the appropriate technique with which to estimate fair value.

The fair value of an asset group and the individual assets is measured in accordance with ASC 820, which establishes a framework for measuring fair value and requires disclosures about fair value measurements. Below is a brief overview of the principles of ASC 820. For detailed information about measuring fair value, see Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option).

2.5.1.1 Exit Price

ASC 820-10-20 defines fair value as the “price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Thus, a fair value measurement is an “exit price.” The exit price for an asset or liability conceptually differs from its transaction price, which is an entry price. While an exit price and an entry price could be the same in many situations, a transaction price cannot be presumed to represent the fair value of an asset or liability.

2.5.1.2 Unit of Valuation Versus Unit of Account

The unit of valuation is the grouping of assets, liabilities, or equity instruments for fair value measurement purposes. ASC 820 provides guidance on determining the unit of valuation. The unit of valuation (also referred to as the “valuation premise”) for nonfinancial assets is the asset’s highest and best use. The highest and best use of an asset might provide maximum value through its use either (1) in combination with other assets or other assets and liabilities or (2) on a stand-alone basis.

The unit of account represents the level of aggregation or disaggregation of individual assets, liabilities, or equity instruments for recognition in the financial statements and is generally determined on the basis of the guidance in the Codification topics. Under ASC 360-10, the unit of account for impairment testing is the asset group (or the disposal group when assets are held for sale). However, the asset group is not the unit of account for recognition purposes when the assets are held and used (but is the unit of account when the disposal group is held for sale). Rather, each of the individual long-lived assets represents a single unit of account. Therefore, in accordance with ASC 360-10-35-28, an entity must allocate the difference between the fair value of the asset group and the carrying amount of the asset group (i.e., the amount of impairment) to individual long-lived assets within the asset group. This allocation is required even if the unit of valuation for fair value measurement purposes is the asset group.

While the unit of account may differ conceptually from the unit of valuation, the unit of account for testing the impairment of the asset group generally will be the same as the unit of valuation. If the entity determines that the unit of valuation should differ from the asset group (i.e., the highest and best use of an asset group would be to group it together with other assets and, possibly, liabilities), it should reconsider whether it has properly identified its asset groups.

2.5.1.3 Highest and Best Use

When determining the fair value of an asset group, an entity must consider the highest and best use of the nonfinancial asset(s) from a market-participant perspective. ASC 820-10-35-10C states that the “[h]ighest and best use is determined from the perspective of market participants, even if the reporting entity intends a different use,” but clarifies that “a reporting entity’s current use of a nonfinancial asset is presumed to be its highest and best use unless market or other factors suggest that a different use by market participants would maximize the value of the asset.”

2.5.1.4 Market Participants

To meet the fair value measurement objective in ASC 820, an entity must develop assumptions that market participants would use to determine the price of an asset, liability, or equity instrument in an orderly transaction as of the measurement date. ASC 820 defines the term “market participants” as follows:

Buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics:

They are independent of each other, that is, they are not related parties, although the price in a related-party transaction may be used as an input to a fair value measurement if the reporting entity has evidence that the transaction was entered into at market terms.
They are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary.
They are able to enter into a transaction for the asset or liability.
They are willing to enter into a transaction for the asset or liability, that is, they are motivated but not forced or otherwise compelled to do so.

2.5.1.5 Principal (or Most Advantageous) Market

Underlying the fair value measurement objective in ASC 820 is the concept of an entity transacting in the principal market for the asset or liability (or equity instrument), or in the absence of a principal market, the most advantageous market. The ASC master glossary defines the principal market as the “market with the greatest volume and level of activity for the asset or liability” and the most advantageous market as the “market that maximizes the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability, after taking into account transaction costs and transportation costs.” The determination of the principal (or most advantageous) market for an asset, liability, or equity instrument can affect the fair value measurement since the exit price may differ from market to market. The concept of the most advantageous market is relevant only if there is no principal market for the asset, liability, or equity instrument subject to the fair value measurement.

2.5.1.6 Valuation Techniques

An entity measures fair value on the basis of one or more of the three valuation approaches outlined in ASC 820-10-35-24A: (1) the market approach, (2) the income approach, or (3) the cost approach. Further, ASC 820-10-35-24 notes that the entity selects one or more techniques “that are appropriate in the circumstances and for which sufficient data are available” to maximize the use of observable inputs while minimizing the use of unobservable inputs. If multiple techniques are used, the entity should evaluate the resultant range and should select a point within the range that is most representative of fair value.

2.5.2 Assets Subject to Nonrecourse Debt

Long-lived assets may include property subject to nonrecourse debt. The fair value of the property should be determined without regard to the nonrecourse provisions. If the carrying amount of the property that reverts back to the lender is less than the amount of nonrecourse debt extinguished, a gain would be recognized on extinguishment. Paragraph B34 of the Background Information and Basis for Conclusions of FASB Statement 144 describes the Board’s rationale for requiring such recognition:

The recognition of an impairment loss and the recognition of a gain on the extinguishment of debt are separate events, and each event should be recognized in the period in which it occurs. The Board believes that the recognition of an impairment loss should be based on the measurement of the asset at its fair value and that the existence of nonrecourse debt should not influence that measurement.

2.5.3 Allocating an Impairment Loss to the Assets in the Asset Group

ASC 360-10

35-28 An impairment loss for an asset group shall reduce only the carrying amounts of a long-lived asset or assets of the group. The loss shall be allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group shall not reduce the carrying amount of that asset below its fair value whenever that fair value is determinable without undue cost and effort. See Example 1 (paragraph 360-10-55-20) for an illustration of this guidance.

If the carrying amount of the asset group exceeds its fair value, an impairment loss is recognized. If the impairment loss is related to an individual long-lived asset, the asset should be reduced to its fair value. If the impairment loss is determined for an asset group, the amount by which the carrying amount exceeds fair value must be allocated to the long-lived assets within the scope of ASC 360-10 “on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group shall not reduce the carrying amount of that asset below its fair value whenever that fair value is determinable without undue cost and effort.” Therefore, the impairment loss should not be allocated to goodwill, indefinite-lived intangibles, or other assets that are not within the scope of ASC 360-10, even if those assets are included in the asset group being tested for recoverability. In addition, entities should not reduce the carrying amount of an individual asset below its fair value whenever the fair value is determinable without undue cost and effort. We believe that since FASB Statement 144 was issued, entities have become more comfortable with fair value measurements and that the fair value of most assets therefore should be determinable without undue cost and effort.

If an entity determines that the fair value of one or more of the long-lived assets in the asset group would exceed its adjusted amount if the impairment were allocated to it, the entity should increase the adjusted carrying value for that asset (or assets) to its fair value and allocate that excess to the other long-lived assets in the group.

An outcome in which an entity cannot recognize the entire impairment loss because it would result in recognition of one or more long-lived assets below fair value is not expected. Accordingly, when such an outcome might be initially indicated, we believe that the entity should revisit (1) the determination of the fair value of the asset group, (2) the determination of the fair value of the individual assets within the group when the impairment loss is allocated, and (3) whether any other assets within the asset group that are not within the scope of ASC 360-10 are impaired in accordance with ASC 360-10-35-27 (see Section 2.3.7).

An entity must use the pro rata allocation approach prescribed by ASC 360 for allocating an impairment loss. That is, the entity cannot pick the long-lived assets to which it will allocate an impairment loss while not allocating the loss to other assets. In some cases, the allocation approach could cause the adjusted carrying amount of an asset to exceed the individual asset’s fair value. An entity is not permitted to write that asset down to its individual fair value and increase the carrying amounts of other long-lived assets in the group.

Example 1 from ASC 360-10-55-20 through 55-22 illustrates the allocation of an impairment loss to the long-lived assets within an asset group.

ASC 360-10

Example 1: Allocation of Impairment Loss

55-20 This Example illustrates the allocation of an impairment loss to the long-lived assets of an asset group (see paragraph 360-10-35-28).

55-21 An entity owns a manufacturing facility that together with other assets is tested for recoverability as a group. In addition to long-lived assets (Assets A–D), the asset group includes inventory measured using first-in, first-out (FIFO), which is reported at the lower of cost and net realizable value in accordance with Topic 330, and other current assets and liabilities that are not covered by this Subtopic. The $2.75 million aggregate carrying amount of the asset group is not recoverable and exceeds its fair value by $600,000. In accordance with paragraph 360-10-35-28, the impairment loss of $600,000 would be allocated as shown below to the long-lived assets of the group.

55-22 If the fair value of an individual long-lived asset of an asset group is determinable without undue cost and effort and exceeds the adjusted carrying amount of that asset after an impairment loss is allocated initially, the excess impairment loss initially allocated to that asset would be reallocated to the other long-lived assets of the group. For example, if the fair value of Asset C is $822,000, the excess impairment loss of $100,000 initially allocated to that asset (based on its adjusted carrying amount of $722,000) would be reallocated as shown below to the other long-lived assets of the group on a pro rata basis using the relative adjusted carrying amounts of those assets.

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