2.2 When to Test a Long-Lived Asset (Asset Group) for Recoverability

ASC 360-10-35-21 requires that an entity test a long-lived asset (asset group) classified as held and used for impairment whenever “events or changes in circumstances indicate that its carrying amount might not be recoverable.” Such an event or change in circumstance is often referred to as a “triggering event.” The basis for this testing framework is described in paragraph B16 of the Background Information and Basis for Conclusions of FASB Statement 144, which states, in part:

Therefore, an entity is not required to perform recoverability tests annually or regularly as it is for certain other assets like goodwill or indefinite-lived intangible assets. However, an entity must continually assess whether events or changes in circumstances indicate that long-lived assets may not be recoverable.

ASC 360-10-35-21 gives examples of events or changes in circumstances that may indicate that the carrying amount of a long-lived asset (group) may not be recoverable. These examples are not all-inclusive, and the existence of an individual factor does not lead to an automatic conclusion that the long-lived asset (group) may not be recoverable. Entities will need to exercise judgment and assess their specific facts and circumstances in determining whether there is a triggering event. Additional events or changes in circumstances that an entity should consider include:

• Evidence of a physical defect in an asset (asset group).
• Substantial doubt about an entityʼs ability to continue as a going concern.
• A significant change in technology that renders an asset (asset group) obsolete or noncompetitive.
• An impairment of goodwill.
• A significant stock price decline.
• Order cancellations or postponements from major customers, or both.
• An increase in vacancy rate or a reduction in rental income.
• A general economic downturn that is expected to have an impact on the entity.

The examples listed in ASC 360-10-35-21 include a “significant decrease in the market price of a long-lived asset (asset group).” Therefore, the existence of an appraisal or other independent valuation information that suggests that the fair value of a held-and-used asset (asset group) is below its carrying amount may be an indicator of impairment. However, the existence of such information does not, in and of itself, mean that an impairment loss must be recognized since a recoverability test must be performed on an undiscounted basis for the long-lived asset (asset group) before recognition of any impairment loss (see Section 2.4).

An entity may be considering selling a part of its business but may not yet meet the criteria to classify the related assets and liabilities as held for sale (see Section 3.3 for more information). ASC 360-10-35-21(f) indicates that management should test the long-lived assets (asset group) for recoverability if there is a “current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.” The threshold for “more likely than not” is considered to be greater than 50 percent but less than probable. Therefore, an entity may be required to test the long-lived assets it expects to sell for recoverability (i.e., on a held-and-used basis) before the assets meet the criteria to be classified as held for sale. The entity should also review depreciation estimates for an asset (asset group) when impairment indicators exist (see Section 2.7).

In some cases, an entity may identify an impairment indicator for a specific asset that is part of a larger asset group. If so, the entity should consider the significance of that individual asset in relation to the asset group as a whole. If the entity determines that the individual asset is insignificant to the asset group, it may decide that it does not need to perform a recoverability test for the asset group but should consider whether to revise the depreciation or amortization estimate for that asset. However, an entity should not recognize an asset that has no future benefit in its financial statements (see Section 2.8).

 

Connecting the Dots

In March 2021, the FASB issued ASU 2021-03, which allows private companies and NFPs to use an accounting alternative for performing the goodwill impairment triggering event evaluation. Specifically, the ASU gives a private company or NFP the option of performing the goodwill impairment triggering event evaluation required by ASC 350-20, as well as any resulting goodwill impairment test, as of the end of the entity’s interim or annual reporting period, as applicable.

The alternative provided by the ASU applies only to monitoring goodwill for impairment triggering events; it does not change existing requirements for private companies and NFPs to monitor their long-lived assets and other assets for triggering events, and perform any required impairment tests, during the reporting period.