Chapter 2 — Long-Lived Assets Classified as Held and Used

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.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.