2.11 Early-Warning Disclosures When Future Impairments Are Reasonably Possible
ASC 360-10 does not specifically require entities to provide
“early-warning” disclosures when it is reasonably possible that an impairment may be
recognized in the near future (e.g., when expected future cash flows on an undiscounted basis exceed the asset by only a small amount or when partial impairments are recognized). As described in paragraph B57 of the Background Information and Basis for Conclusions of FASB Statement 144, the Board decided that
entities did not need to provide any specific disclosures in such cases because the
disclosure requirements in ASC 275-10 related to risks and uncertainties associated
with the use of estimates in the preparation of the entity’s financial statements
would be relevant.
ASC 275-10
Certain Significant Estimates
50-6
This Subtopic requires discussion of estimates when, based
on known information available before the financial
statements are issued or are available to be issued (as
discussed in Section 855-10-25), it is reasonably possible
that the estimate will change in the near term and the
effect of the change will be material. The estimate of the
effect of a change in a condition, situation, or set of
circumstances that existed at the date of the financial
statements shall be disclosed and the evaluation shall be
based on known information available before the financial
statements are issued or are available to be issued (as
discussed in Section 855-10-25).
50-7
Various Topics require disclosures about uncertainties
addressed by those Topics. In particular, Subtopic 450-20
specifies disclosures to be made about contingencies that
exist at the date of the financial statements. In addition
to disclosures required by Topic 450 and other accounting
Topics, this Subtopic requires disclosures regarding
estimates used in the determination of the carrying amounts
of assets or liabilities or in disclosure of gain or loss
contingencies, as described below.
50-8
Disclosure regarding an estimate shall be made when known
information available before the financial statements are
issued or are available to be issued (as discussed in
Section 855-10-25) indicates that both of the following
criteria are met:
- It is at least reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that existed at the date of the financial statements will change in the near term due to one or more future confirming events.
- The effect of the change would be material to the financial statements.
ASC 360-10 also includes an example illustrating how an entity might disclose
information about a potential impairment.
ASC 360-10
Example 12: Specialized Equipment — Potential
Impairment
55-50
Offshore Industries is a manufacturer of offshore drilling
rigs and platforms. The entity’s manufacturing process
requires significant specialized equipment, which it
currently owns. As a result of a decline in the price of
oil, the demand for its products and services has fallen
dramatically in the past two years, resulting in a
significant underutilization of its manufacturing capacity.
55-51
The entity depreciates its investments in specialized
equipment based on its original estimate of the remaining
useful lives of the equipment using the units-of-production
method, since it believes that the exhaustion of usefulness
of these specialized assets relates more to their use than
to the passage of time. The entity reevaluates these
estimates in light of current conditions in accordance with
generally accepted accounting principles (GAAP). The entity
also monitors the policies of its major competitors and is
aware that several have reported large write-downs of
similar assets. Nevertheless, while the entity believes that
it is at least reasonably possible that its estimate that it
will recover the carrying amount of those assets from future
operations will change during the next year, it believes it
is more likely that conditions in the industry will improve
and that no write-down for impairment will be necessary.
55-52
The entity would make the following disclosure:
Offshore’s policy is to depreciate specialized manufacturing
equipment (with a net book value of $25 million at December
31, 19X7) over its remaining useful life using the
units-of-production method and to evaluate the remaining
life and recoverability of such equipment in light of
current conditions. [Given the excess capacity in the
industry,] it is reasonably possible that the entity’s
estimate that it will recover the carrying amount of this
equipment from future operations will change in the near
term.
55-53
Regarding the preceding illustrative disclosure, if the
information in the first sentence is already disclosed
elsewhere in the notes, it need not be repeated. Also, the
bracketed material in the second sentence represents an
example of voluntary disclosure that is encouraged by
paragraph 275-10-50-9.
55-54
In this Example, the entity acknowledges that the carrying
amount of the specialized assets is subject to significant
uncertainty based on current conditions. The uncertainty
relates to the measurement of the specialized assets at the
date of the financial statements, and the entity’s
disclosure makes clear that it is at least reasonably
possible that the carrying amount will change in the near
term.
SEC Considerations
SEC Regulation S-K, Item 303(b)(2), requires registrants to
discuss in MD&A a known uncertainty — specifically, to disclose the
potential for a material impairment charge — in light of potential
impairment triggers. In addition, the SEC staff has stated that it expects
consistency between assumptions and estimates used to estimate expected
future cash flows for impairment analyses and MD&A. For example, the SEC
would challenge a registrant that uses pessimistic assumptions in estimating
expected future cash flows to support an impairment write-down while
describing an optimistic outlook for operations in MD&A. MD&A
disclosures should be consistent with management’s support for expected
future cash flows for testing impairment under ASC 360-10. See Section 8.8 for more
information about required impairment disclosures for SEC registrants.