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

2.4 Testing Long-Lived Assets for Recoverability

ASC 360-10

Long-Lived Assets Classified as Held and Used

35-16 This guidance addresses how long-lived assets or asset groups that are intended to be held and used in an entity’s business shall be reviewed for impairment.

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.

05-6 This Subsection provides guidance that focuses on developing estimates of future cash flows used to test for recoverability, including the:

Cash flow estimation approach
Cash flow estimation period
Types of asset-related expenditures that should be considered in developing estimates of future cash flows.

Under ASC 360-10-35-17, an asset group is not recoverable if its carrying amount “exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group).” The process of determining whether an asset group is recoverable is generally referred to as the “recoverability test.”

When an asset group is not recoverable, it is necessary to determine its fair value since “an impairment loss shall be measured as the amount by which the carrying amount of the long-lived asset (asset group) exceeds its fair value.”

If the asset group is determined to be recoverable, no impairment loss is recognized even if the carrying value of the asset group exceeds its fair value. However, even if the asset group is determined to be recoverable, an entity should consider whether it should revise the depreciation or amortization estimates for the long-lived assets in the group (see Section 2.7).

2.4.1 Estimates of Future Cash Flows Used to Test Long-Lived Assets for Recoverability

ASC 360-10

35-29 Estimates of future cash flows used to test the recoverability of a long-lived asset (asset group) shall include only the future cash flows (cash inflows less associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset (asset group). Those estimates shall exclude interest charges that will be recognized as an expense when incurred.

35-30 Estimates of future cash flows used to test the recoverability of a long-lived asset (asset group) shall incorporate the entity’s own assumptions about its use of the asset (asset group) and shall consider all available evidence. The assumptions used in developing those estimates shall be reasonable in relation to the assumptions used in developing other information used by the entity for comparable periods, such as internal budgets and projections, accruals related to incentive compensation plans, or information communicated to others. However, if alternative courses of action to recover the carrying amount of a long-lived asset (asset group) are under consideration or if a range is estimated for the amount of possible future cash flows associated with the likely course of action, the likelihood of those possible outcomes shall be considered. A probability-weighted approach may be useful in considering the likelihood of those possible outcomes. See Example 2 (paragraph 360-10-55-23) for an illustration of this guidance.

ASC 360-10-35-29 states that “[e]stimates of future cash flows used to test the recoverability of [an asset group should] include only the future cash flows (cash inflows less associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the [asset group].”

Certain costs that are directly attributable to a specific asset group may be recognized at the corporate level for administrative purposes or recognized by another part of the entity. Estimated future cash flows should include all cash outflows necessary to support the cash inflows of the asset group. Therefore, cash outflows should include an allocation of shared costs or costs incurred by the entity on behalf of the asset group that are directly attributable to the asset group even if such costs are not allocated to that group for internal reporting purposes. For example, advertising expenses for a fast-food chain may be identifiable with specific market areas or stores but may be invoiced in the aggregate and recognized at the corporate level. Accordingly, such advertising costs are directly attributable to the asset group and therefore may be included in the asset group’s cash flow projections. However, other expenses, such as corporate overhead, may not be directly attributable to a particular asset group (e.g., the CEO’s salary or rent on the corporate headquarters building).

Since the guidance in ASC 360-10 is relatively limited, an entity may find it challenging and need to use judgment to identify which cash flows to include in or exclude from the recoverability test.

2.4.1.1 Estimates of Future Cash Flows Are Undiscounted and Based on the Entity’s Expected Use of the Asset Group

The cash flows used in the recoverability test are undiscounted and based on the entity’s own assumptions about its use and eventual disposition of the asset group. Therefore, the cash flows incorporate the entity’s intent regarding how it plans to recover the value of the asset group rather than assessing how a market participant might use and eventually dispose of the asset group. Accordingly, the cash flow amount used in the recoverability test could differ from a fair value measurement by more than just discounting. Entities are permitted to use either a probability-weighted or a best estimate cash flow approach to test long-lived assets for recoverability (see Section 2.4.3). However, if the entity is considering alternative courses of action to recover an asset (e.g., either through sale or continued use), it may be useful for the entity, in considering the likelihood of potential outcomes, to employ a probability-weighted approach in which the possible scenarios are weighed on the basis of the entity’s current expectations about the course of action it will take to recover the assets.

Further, the cash flows used in the recoverability test should only include cash flows associated with future expenditures (e.g., repairs and maintenance and replacements) necessary to maintain the existing service potential of the asset group (see Section 2.4.5 for more information).

The cash flows used in the recoverability test should be based only on facts and circumstances available as of the testing date (see Section 2.4.2 for more details).

2.4.1.2 Estimates of Future Cash Flows Arising From the Eventual Disposition of the Asset Group

ASC 360-10-35-29 indicates that in the development of cash flow estimates, the estimates of future cash flows should also include the cash flows that are expected to arise from the eventual disposition of the asset group. Therefore, the undiscounted cash flows should include any estimated sales proceeds from the sale of the asset group at the end of the cash flow estimation period.

The estimated sales proceeds represent the price the entity would expect to receive for the asset group on the basis of its existing service potential as of the assumed disposition date. The entity should use assumptions that would maximize the proceeds that would be received in selling the asset group. That is, in some cases, the asset group sold as a whole would be assumed to receive a greater return than the sale of the assets individually, or vice versa. In addition, an asset group that is a business may be assumed to receive higher proceeds than an asset group that is not a business. The cash flows from the sale of an asset group that is a business generally represent the value of an operating business at the end of the cash flow estimation period, while the cash flows from the sale of an asset group that is not a business generally represent the salvage value of the assets at the end of the cash flow estimation period. However, the entity must continue to use entity-specific assumptions for the recoverability test and should only assume proceeds on the basis of the existing service potential and the entity’s use of the asset; such assumptions could differ from market-participant assumptions in some cases. Existing service potential does not mean that the entity should assume a zero growth rate for the asset group; instead, any growth should be limited to the asset groupʼs existing service potential. For example, the entity can assume growth if its facilities have excess capacity and it can support its projections for customer demand for its products. However, it would not be appropriate to assume continued growth if the entityʼs facilities are currently operating at maximum capacity and the building of an additional facility would be required to achieve the projected growth.

2.4.1.3 Estimates of Future Cash Flows Should Be Reasonable

ASC 360-10 does not place any specific limits on the growth assumptions used in the recoverability test. However, ASC 360-10-35-30 states that the assumptions used to develop cash flow estimates should be “reasonable in relation to the assumptions used in developing other information used by the entity for comparable periods, such as internal budgets and projections, accruals related to incentive compensation plans, or information communicated to others.” In addition, the entity should ensure that the projections are consistent with budgets, forecasts, and other information prepared by the entity such as those used to test goodwill for impairment and to assess the recoverability of deferred tax assets. However, such projections may differ when an entity has negative evidence in the form of cumulative losses. (See Section 5.3.2.1 of Deloitte’s Roadmap Income Taxes for additional guidance on developing objective and verifiable projections of taxable income when an entity is in a cumulative loss.) Moreover, the entity should ensure that such projections are in line with other data such as industry growth rates and trends. Thus, if an entity has a reasonable basis for assuming that prices or volumes will increase from current levels, it is appropriate for the entity to reflect such growth assumptions in its cash flow estimates.

In SAB Topic 5.CC, the SEC staff expresses its views on an entity’s judgments regarding the cash flows used in the recoverability test.

SEC Staff Accounting Bulletins

SAB Topic 5.CC, Impairments [Reproduced in ASC 360-10-S99-2]

Question 3: Has the staff expressed any views with respect to company-determined estimates of cash flows used for assessing and measuring impairment of assets under FASB ASC Topic 360?

Interpretive Response: In providing guidance on the development of cash flows for purposes of applying the provisions of that Topic, FASB ASC paragraph 360-10-35-30 indicates that “estimates of future cash flows used to test the recoverability of a long-lived asset (asset group) shall incorporate the entity’s own assumptions about its use of the asset (asset group) and shall consider all available evidence. The assumptions used in developing those estimates shall be reasonable in relation to the assumptions used in developing other information used by the entity for comparable periods, such as internal budgets and projections, accruals related to incentive compensation plans, or information communicated to others.”

The staff recognizes that various factors, including management’s judgments and assumptions about the business plans and strategies, affect the development of future cash flow projections for purposes of applying FASB ASC Topic 360. The staff, however, cautions registrants that the judgments and assumptions made for purposes of applying FASB ASC Topic 360 must be consistent with other financial statement calculations and disclosures and disclosures in MD&A. The staff also expects that forecasts made for purposes of applying FASB ASC Topic 360 be consistent with other forward-looking information prepared by the company, such as that used for internal budgets, incentive compensation plans, discussions with lenders or third parties, and/or reporting to management or the board of directors.

For example, the staff has reviewed a fact pattern where a registrant developed cash flow projections for purposes of applying the provisions of FASB ASC Topic 360 using one set of assumptions and utilized a second, more conservative set of assumptions for purposes of determining whether deferred tax valuation allowances were necessary when applying the provisions of FASB ASC Topic 740, Income Taxes. In this case, the staff objected to the use of inconsistent assumptions.

In addition to disclosure of key assumptions used in the development of cash flow projections, the staff also has required discussion in MD&A of the implications of assumptions. For example, do the projections indicate that a company is likely to violate debt covenants in the future? What are the ramifications to the cash flow projections used in the impairment analysis? If growth rates used in the impairment analysis are lower than those used by outside analysts, has the company had discussions with the analysts regarding their overly optimistic projections? Has the company appropriately informed the market and its shareholders of its reduced expectations for the future that are sufficient to cause an impairment charge? The staff believes that cash flow projections used in the impairment analysis must be both internally consistent with the company’s other projections and externally consistent with financial statement and other public disclosures.

Connecting the Dots

ASC 930-360-35-1 and 35-2 provide specific guidance on estimating future cash flows (both undiscounted and discounted) to determine whether a mining entity’s value beyond proven and probable reserves is impaired:

35-1 An entity shall include the cash flows associated with value beyond proven and probable reserves in estimates of future cash flows (both undiscounted and discounted) used for determining whether a mining asset is impaired under paragraphs 360-10-15-3 through 15-5. Estimated cash flows also shall include the estimated cash outflows required to develop and extract the value beyond proven and probable reserves.

35-2 An entity shall consider the effects of anticipated fluctuations in the market price of minerals when estimating future cash flows (both undiscounted and discounted) used for determining whether a mining asset is impaired under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10. Estimates of those effects shall be consistent with estimates of a market participant. Generally, an entity shall consider all available information including current prices, historical averages, and forward pricing curves. Those marketplace assumptions typically shall be consistent with an entity’s operating plans and financial projections underlying other aspects of the impairment analysis (for example, amount and timing of production). It generally would be inappropriate for an entity to use a single factor, such as the current price or a historical average, as a surrogate for estimating future prices without considering other information that a market participant would consider.

An entity may determine that there is substantial doubt about its ability to continue as a going concern and, therefore, that it must test its long-lived assets for recoverability. Provided that its financial statements continue to be presented on a going-concern basis (i.e., not on a liquidation basis of accounting), the cash flow estimates the entity uses for recoverability testing may extend beyond one year on the basis of the remaining useful life of the primary asset (see Section 2.4.4). However, an entity should ensure that its cash flow estimates are reasonable given the circumstances. In addition, if there is substantial doubt about an entity's ability to continue as a going concern, it is more likely that the entity is considering alternative courses of action and, therefore, that use of a probability-weighted approach to estimate cash flows may be warranted (see Section 2.4.3).

An entity in bankruptcy may use projections from its reorganization plan to determine future cash flows provided that (1) the reorganization has been confirmed by the bankruptcy court or (2) management (following the advice of counsel) believes that the reorganization will be approved by the bankruptcy court. The cash flow estimates the entity uses for recoverability testing may extend beyond the expected bankruptcy filing and emergence date provided that the entity can support the estimates upon emergence from bankruptcy. However, an entity should carefully consider the factors that led it to file for bankruptcy and should ensure that any forecasts beyond the emergence date are reasonable given the circumstances. In addition, the entity may want to use a probability-weighted approach to estimate cash flows (see Section 2.4.3), possibly factoring in a sale of assets if the entity were not to obtain the needed financing or emerge from bankruptcy.

2.4.1.4 Cash Flows for Interest Charges

ASC 360-10-35-29 clarifies that the estimates of future cash flows should “exclude interest charges that will be recognized as an expense when incurred” to ensure that two entities with essentially the same assets (asset groups) and cash flows do not have different assessments of recoverability as a result of differences in their capital structures. Therefore, interest changes should not be included in the cash flows when the assets are in use (see Section 2.4.5) but capitalized interest should be included when assets are under development (see Section 2.4.6). (Also see Section 2.3.3 for a discussion of debt in asset groups.)

2.4.1.5 Cash Flows From Hedging Instruments

On the basis of the guidance in ASC 815-30-35-42, we believe that an entity should exclude the expected cash flows of a derivative hedging instrument from the estimates of future cash flows when testing an asset group for recoverability. (However, entities with oil- and gas-producing activities that apply the full cost method of accounting should consider the guidance in ASC 932-360-S99-2.) ASC 815-30-35-42 states:

Existing requirements in generally accepted accounting principles (GAAP) for assessing asset impairment or credit losses or recognizing an increased obligation apply to an asset or liability that gives rise to variable cash flows (such as a variable-rate financial instrument) for which the variable cash flows (the forecasted transactions) have been designated as being hedged and accounted for pursuant to paragraphs 815-30-35-3 and 815-30-35-38 through 35-41. Those impairment or credit loss requirements shall be applied each period after hedge accounting has been applied for the period, pursuant to those paragraphs. The fair value or expected cash flows of a hedging instrument shall not be considered in applying those requirements. The gain or loss on the hedging instrument in accumulated other comprehensive income shall, however, be accounted for as discussed in paragraphs 815-30-35-38 through 35-41.

2.4.1.6 Cash Flows From Insurance Recoveries

ASC 360-10-35-29 states that “[e]stimates of future cash flows used to test the recoverability of a long-lived asset (asset group) shall include only the future cash flows (cash inflows less associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset (asset group).” Accordingly, we do not believe that an entity should include cash inflows from an insurance recovery related to the damage or destruction of a long-lived asset in its cash flow estimates for an asset group, since such cash inflows do not arise as a direct result of the use and eventual disposition of the asset. Rather, we believe that the entity should apply the principles in ASC 360 to recognize any impairment loss for the long-lived asset separately from any insurance recovery. Therefore, expenditures needed to repair or replace the existing asset (if the same service potential is assumed) should be included in the entity’s cash flow estimates.

By contrast, some entities obtain business interruption insurance, which is insurance coverage that reimburses an entity’s operating cash flows if it cannot operate (or can operate only at a reduced capacity) because of a covered loss. We believe that it is appropriate to include the cash flows related to business interruption insurance in the cash flow estimates used to test an asset group for recoverability.

The accounting framework underlying the insurance recovery model is based on an analogy to the guidance in ASC 410 on recognition of potential loss recoveries. Specifically, ASC 410-30-35-8, which provides subsequent-measurement guidance related to environmental obligations, states, in part:

Potential recoveries may be claimed from a number of different parties or sources, including insurers, potentially responsible parties other than participating potentially responsible parties (see paragraph 410-30- 30-2), and governmental or third-party funds. The amount of an environmental remediation liability should be determined independently from any potential claim for recovery, and an asset relating to the recovery shall be recognized only when realization of the claim for recovery is deemed probable. The term probable is used in this Subtopic with the specific technical meaning in paragraph 450-20-25-1 [the future event or events are likely to occur].

The recognition criteria for a loss recovery differ from those for a gain contingency. Provided that its collection is probable, a loss recovery is recognized in the period in which the loss is incurred (or the period in which collection becomes probable). By contrast, a gain contingency is recognized when it is realized or when it is realizable, whichever is earlier. While not codified, paragraph 16 of EITF Issue 01-10 discusses the EITF’s understanding of the distinction between a loss recovery and a gain contingency: a loss recovery represents the recovery of a loss already recognized in the financial statements, whereas a gain contingency represents the recovery of a loss not yet recognized in the financial statements or recovery of an amount that is greater than the loss recognized in the financial statements. Thus, a loss recovery may only be recognized up to the amount of the loss incurred for an insurance recovery. Similarly, for business interruption insurance, we do not believe that it would be appropriate to recognize an amount in excess of the recovery of costs. Any excess would be recognized as a gain contingency in income when realized or realizable.

2.4.2 Cash Flow Estimates Based on Facts and Circumstances That Exist as of the Testing Date

Estimates of future cash flows used to test recoverability of an asset group should take into account the facts and circumstances that exist as of the testing date. For example, assume that an entity concludes that it has a triggering event as of its fiscal year-end and performs a recoverability test as of that date in the subsequent period. While performing the test and while having no intention of disposing of the asset group, the entity receives and accepts an unsolicited offer for the asset group. In performing the required recoverability test on a held-and-used basis, since the entity had no intention of disposing of the asset group as of the testing date, it should not assume that the asset group would be sold (or use a probability-weighted approach and include a sale as one of the scenarios) (see the next section).

2.4.3 Probability-Weighted and Best-Estimate Cash Flow Approaches

Entities are permitted to use either a best-estimate approach or a probability-weighted approach to estimating future cash flows. ASC 360-10-35-30 states, in part:

However, if alternative courses of action to recover the carrying amount of a long-lived asset (asset group) are under consideration or if a range is estimated for the amount of possible future cash flows associated with the likely course of action, the likelihood of those possible outcomes shall be considered. A probability-weighted approach may be useful in considering the likelihood of those possible outcomes.

An entity often uses a best-estimate approach when (1) operations are stable and (2) the entity is not considering alternative courses of action to recover an asset. However, when operations are not stable and there is a range of possible future cash flows or the entity is considering alternatives, such as potentially selling or abandoning an asset group versus continuing to use it, entities typically use a probability-weighted approach to comply with ASC 360-10-35-30. Specifically, ASC 360-10-35-30 states that if alternative courses of action are under consideration, “the likelihood of those possible outcomes shall be considered.” An entity is not precluded from using different approaches for different asset groups if management is considering different alternatives for one asset group but not for others.

One of the impairment indicators in ASC 360-10-35-21 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 term more likely than not refers to a level of likelihood that is more than 50 percent.” Therefore, entities may need to perform a recoverability test when they are considering selling an asset group but have not yet met the held-for-sale classification criteria. ASC 360-10-55-23 through 55-29 contain an example illustrating the probability-weighted approach for developing estimates of future cash flows when an entity is considering selling an asset group.

ASC 360-10

Example 2: Probability-Weighted Cash Flows

55-23 This Example illustrates the use of a probability-weighted approach for developing estimates of future cash flows used to test a long-lived asset for recoverability when alternative courses of action are under consideration (see paragraph 360-10-35-30). This Example has the following Cases:

Probability-weighted cash flows (Case A)
Expected cash flows technique (Case B).

55-24 Cases A and B share all of the following assumptions.

55-25 As of December 31, 20X2, a manufacturing facility with a carrying amount of $48 million is tested for recoverability. At that date, 2 courses of action to recover the carrying amount of the facility are under consideration — sell in 2 years or sell in 10 years (at the end of its remaining useful life).

55-26 The possible cash flows associated with each of those courses of action are $41 million and $48.7 million, respectively. They are developed based on entity-specific assumptions about future sales (volume and price) and costs in varying scenarios that consider the likelihood that existing customer relationships will continue, changes in economic (market) conditions, and other relevant factors.

Case A: Probability-Weighted Cash Flows

55-27 The following table shows the possible cash flows associated with each of the courses of action — sell in 2 years or sell in 10 years.

55-28 As further indicated in the following table, there is a 60 percent probability that the facility will be sold in 2 years and a 40 percent probability that the facility will be sold in 10 years.

55-29 The alternatives of whether to sell or use an asset are not necessarily independent of each other. In many situations, after estimating the possible future cash flows relating to those potential courses of action, an entity might select the course of action that results in a significantly higher estimate of possible future cash flows. In that situation, the entity generally would use the estimates of possible future cash flows relating only to that course of action in computing future cash flows. As shown, the expected cash flows are $44.1 million (undiscounted). Therefore, the carrying amount of the facility of $48 million would not be recoverable.

Case B: Expected Cash Flows Technique

55-30 This Case illustrates the application of an expected present value technique to estimate the fair value of a long-lived asset in an impairment situation.

55-31 The following table shows by year the computation of the expected cash flows used in the measurement. They reflect the possible cash flows (probability-weighted) used to test the manufacturing facility for recoverability in Case A, adjusted for relevant marketplace assumptions, which increases the possible cash flows in total by approximately 15 percent.

55-32 The following table shows the computation of the expected present value; that is, the sum of the present values of the expected cash flows by year, each discounted at a risk-free interest rate determined from the yield curve for U.S. Treasury instruments. In this Case, a market risk premium is included in the expected cash flows; that is, the cash flows are certainty equivalent cash flows. As shown, the expected present value is $42.3 million, which is less than the carrying amount of $48 million. In accordance with paragraph 360-10-35-17 the entity would recognize an impairment loss of $5.7 million.

2.4.4 Primary Asset and the Cash Flow Estimation Period

ASC 360-10

35-31 Estimates of future cash flows used to test the recoverability of a long-lived asset (asset group) shall be made for the remaining useful life of the asset (asset group) to the entity. The remaining useful life of an asset group shall be based on the remaining useful life of the primary asset of the group. For purposes of this Subtopic, the primary asset is the principal long-lived tangible asset being depreciated or intangible asset being amortized that is the most significant component asset from which the asset group derives its cash-flow-generating capacity. The primary asset of an asset group therefore cannot be land or an intangible asset not being amortized.

35-32 Factors that an entity generally shall consider in determining whether a long-lived asset is the primary asset of an asset group include the following:

Whether other assets of the group would have been acquired by the entity without the asset
The level of investment that would be required to replace the asset
The remaining useful life of the asset relative to other assets of the group. If the primary asset is not the asset of the group with the longest remaining useful life, estimates of future cash flows for the group shall assume the sale of the group at the end of the remaining useful life of the primary asset.

The period over which an entity should estimate cash flows when performing the recoverability test for a single long-lived asset should correspond to the asset’s remaining useful life to the entity. When long-lived assets with different remaining useful lives are grouped together to form an asset group, the cash flow estimation period for the group is based on the remaining useful life of the primary asset of the group to the entity.

According to ASC 360-10-35-31, the primary asset is “the principal long-lived tangible asset being depreciated or intangible asset being amortized that is the most significant component asset from which the asset group derives its cash-flow-generating capacity.” To prevent an entity from estimating cash flows over an unlimited period, the primary asset must be an asset with a finite useful life and therefore cannot be land, goodwill, an indefinite-lived intangible asset, or an internally generated intangible asset that has been expensed as incurred.

The primary asset is typically the asset in the asset group that has the longest remaining useful life to the entity, would require the highest level of investment to replace, and without which some or all of the other assets of the group might not have continuing service potential. The primary asset is not always the asset with the longest remaining useful life. ASC 360-10-35-32(c) states that if the primary asset is not the asset that has the longest remaining useful life, estimates of future cash flows for the group should be based on the assumption that the group will be sold “at the end of the remaining useful life of the primary asset.” In some cases, identifying the primary asset is relatively straightforward, but in other cases it may be challenging, especially when multiple long-lived assets appear crucial to generating the cash flows of the asset group. Entities will therefore need to apply judgment in such situations.

If the entity determines that it must change the depreciation or amortization period for the primary asset, it must use the revised useful life in developing its cash flow estimates. For example, if, concurrently with the triggering event, the entity determines that it must shorten the useful life of the primary asset from five years to three years, the undiscounted cash flows should be determined for the revised useful life of the primary asset, which would be three years. See Section 2.7 for more information.

2.4.5 Expenditures for Assets That Are in Use

ASC 360-10

35-33 Estimates of future cash flows used to test the recoverability of a long-lived asset (asset group) that is in use, including a long-lived asset (asset group) for which development is substantially complete, shall be based on the existing service potential of the asset (asset group) at the date it is tested. The service potential of a long-lived asset (asset group) encompasses its remaining useful life, cash-flow-generating capacity, and for tangible assets, physical output capacity. Those estimates shall include cash flows associated with future expenditures necessary to maintain the existing service potential of a long-lived asset (asset group), including those that replace the service potential of component parts of a long-lived asset (for example, the roof of a building) and component assets other than the primary asset of an asset group. Those estimates shall exclude cash flows associated with future capital expenditures that would increase the service potential of a long-lived asset (asset group).

ASC 360-10 requires that the cash flows used in the recoverability test for an asset group that is in use (including an asset group for which development is substantially complete) be based on the existing service potential of an asset group as of the date on which it is tested.

According to paragraph B29 of the Background Information and Basis for Conclusions of FASB Statement 144, “estimates of future cash flows used to test recoverability should include cash flows (including estimated salvage values) associated with asset-related expenditures that replace (a) component parts of a long-lived asset or (b) component assets (other than the primary asset) of an asset group, whether those expenditures would be recognized as an expense or capitalized in future periods.” However, paragraph B28 states that such estimates should exclude “the cash flows associated with asset-related expenditures that would enhance the existing service potential of a long-lived asset (asset group) that is in use.” Cash flow estimates should be based on the existing service potential of the asset group and therefore should include cash flows associated with future expenditures (e.g., repairs and maintenance and replacements) necessary to maintain the service potential of the asset group. Accordingly, if the entity’s budgets and forecasts assume major capital improvements or expansion rather than maintenance and capital replacements, an entity should exclude the capital improvements or expansions from its cash flows estimates in assessing impairment.

Connecting the Dots

ASC 360-10 provides no guidance on determining at what point a long-lived asset (asset group) in development is “substantially complete.” We believe that, in such circumstances, an entity should look to the guidance in ASC 835-20-25-5, which states:

The capitalization period shall end when the asset is substantially complete and ready for its intended use. Consider the capitalization period that is appropriate in each of the following examples:

Some assets are completed in parts, and each part is capable of being used independently while work is continuing on other parts. An example is a condominium. For such assets, interest capitalization shall stop on each part when it is substantially complete and ready for use.
Some assets must be completed in their entirety before any part of the asset can be used. An example is a facility designed to manufacture products by sequential processes. For such assets, interest capitalization shall continue until the entire asset is substantially complete and ready for use.
Some assets cannot be used effectively until a separate facility has been completed. Examples are the oil wells drilled in Alaska before completion of the pipeline. For such assets, interest capitalization shall continue until the separate facility is substantially complete and ready for use.

ASC 835-20-25-6 also states that an asset may be considered substantially complete when the “completion of the asset is intentionally delayed.”

2.4.6 Expenditures for Assets That Are Under Development

ASC 360-10

35-34 Estimates of future cash flows used to test the recoverability of a long-lived asset (asset group) that is under development shall be based on the expected service potential of the asset (group) when development is substantially complete. Those estimates shall include cash flows associated with all future expenditures necessary to develop a long-lived asset (asset group), including interest payments that will be capitalized as part of the cost of the asset (asset group). Subtopic 835-20 requires the capitalization period to end when the asset is substantially complete and ready for its intended use.

35-35 If a long-lived asset that is under development is part of an asset group that is in use, estimates of future cash flows used to test the recoverability of that group shall include the cash flows associated with future expenditures necessary to maintain the existing service potential of the group (see paragraph 360-10-35-33) as well as the cash flows associated with all future expenditures necessary to substantially complete the asset that is under development (see the preceding paragraph). See Example 3 (paragraph 360-10-55-33). See also paragraphs 360-10-55-7 through 55-18 for considerations of site restoration and environmental exit costs.

Paragraph B31 of the Background Information and Basis for Conclusions of FASB Statement 144 states, in part:

The Board observed that in contrast to a long-lived asset (asset group) that is in use, a long-lived asset (asset group) that is under development will not provide service potential until development is substantially complete. The Board decided that such an asset (asset group) should be tested for recoverability based on its expected service potential.

Therefore, ASC 360-10-35-35 requires that estimates of future cash flows used in the recoverability test include the cash flows (cash outflows and cash inflows) associated with all future asset-related expenditures necessary to develop the asset group, regardless of whether those expenditures would be recognized as an expense or capitalized in future periods.

While ASC 360-10-35-29 requires that cash flow estimates used in a recoverability test exclude interest payments that will be recognized as an expense when incurred, the cash flow estimates for asset groups under development should include interest payments that will be capitalized in accordance with ASC 835-20 as part of the cost of the assets in the group. Paragraph B32 of the Background Information and Basis for Conclusions of FASB Statement 144 states, in part:

The Board reasoned that for a long-lived asset (asset group) that is under development, there is no difference between interest payments and other asset-related expenditures that would be capitalized in future periods. Therefore, the Board decided that estimates of future cash flows used to test a long-lived asset (asset group) for recoverability should exclude only those interest payments that would be recognized as an expense when incurred.

Further, ASC 360-10-35-35 states that “[i]f a long-lived asset that is under development is part of an asset group that is in use, estimates of future cash flows used to test the recoverability of that group shall include” future asset-related expenditures needed to (1) “substantially complete the asset that is under development” and (2) maintain the existing service potential of the other assets that are in use. ASC 360-10 includes an example illustrating this concept.

ASC 360-10

Example 3: Estimates of Future Cash Flows Used to Test an Asset Group for Recoverability

55-33 A long-lived asset that is under development may be part of an asset group that is in use. In that situation, estimates of future cash flows used to test the recoverability of that group shall include the cash flows associated with future expenditures necessary to maintain the existing service potential of the group as well as the cash flows associated with future expenditures necessary to substantially complete the asset that is under development (see paragraph 360-10-35-35).

55-34 An entity engaged in mining and selling phosphate estimates future cash flows from its commercially minable phosphate deposits in order to test the recoverability of the asset group that includes the mine and related long-lived assets (plant and equipment). Deposits from the mined rock must be processed in order to extract the phosphate. As the active mining area expands along the geological structure of the mine, a new processing plant is constructed near the production area. Depending on the size of the mine, extracting the minable deposits may require building numerous processing plants over the life of the mine. In testing the recoverability of the mine and related long-lived assets, the estimates of future cash flows from its commercially minable phosphate deposits would include cash flows associated with future expenditures necessary to build all of the required processing plants.

Example 2-2

Entity D designs, develops, and manufactures components for high-speed optical networks. The majority of D’s customers are building communication infrastructures. In December 20X1, D purchased a plot of land in an industrial complex, intending to build a state-of-the-art production facility for D’s integrated circuit and module products. Construction of the new facility began in March 20X2 and is expected to be completed by the end of August 20X2. In June 20X2, a number of D’s customers announced plans to cut the level of capital expenditures related to their infrastructure buildout and D has received several order cancellations. As of June 30, 20X2, because of the significant change in business climate, D has determined that it is required to assess the recoverability of the new production facility in accordance with ASC 360-10-35-21(c).

ASC 360-10-35-34 requires that estimates of future cash flows for the partially completed production facility include all cash outflows associated with the completion of the facility, including any interest payments that would be capitalized as part of the facility. Therefore, D should include the remaining costs associated with completing the production facility in its estimates of future cash flows when assessing the asset group for recoverability. In addition, D will need to include any payments to maintain the existing service potential related to the facility once it is open for production. Entity D’s estimates of future cash flows used to test the recoverability of the facility should be based on its expected useful life.

2.4.7 Certain Site Restoration and Environmental Exit Costs

ASC 360-10-55 provides detailed guidance on how an entity should treat site restoration and environmental exit costs when testing an asset group for recoverability. It lists indicators for when the cash flows for environmental exit costs would or would not be included in the cash flows used for recoverability testing.

ASC 360-10

Treatment of Certain Site Restoration and Environmental Exit Costs When Testing a Long-Lived Asset for Impairment

55-1 The following guidance demonstrates the consideration of restoration and environmental exit costs when testing a long-lived asset for impairment. Paragraphs 360-10-35-18 through 35-19 also provide guidance for such testing for assets subject to asset retirement obligations.

55-2 For certain assets covered by this Subtopic, costs for future site restoration or closure (environmental exit costs) may be incurred if the asset is sold, is abandoned, or ceases operations. Environmental exit costs within the scope of this Subsection include:

Asset retirement costs recognized pursuant to Subtopic 410-20
Asset retirement costs that have not been recognized because the obligation has not been incurred
Certain environmental remediation costs that have not yet been recognized as a liability pursuant to Subtopic 410-30.

55-3 Pursuant to Subtopic 410-20, asset retirement costs may be incurred over more than one reporting period. For example, the liability for performing certain capping, closure, and postclosure activities in connection with operating a landfill is incurred as the landfill receives waste.

55-4 The related cash flows, if any, might not occur until the end of the asset’s life if the asset ceases operations, or they might be deferred indefinitely as long as the asset is not sold or abandoned.

55-5 The issue is whether the cash flows associated with environmental exit costs that may be incurred if a long-lived asset is sold, is abandoned, or ceases operations should be included in the undiscounted expected future cash flows used to test a long-lived asset for recoverability under this Subtopic.

55-6 For environmental exit costs that have not been recognized as a liability for accounting purposes, whether those environmental exit costs shall be included in the undiscounted expected future cash flows used to test a long-lived asset for recoverability under this Subtopic depends on management’s intent with respect to the asset. Pursuant to this Subtopic, if management’s intent contemplates alternative courses of action to recover the carrying amount of the asset or if a range is estimated for the amount of possible future cash flows, the likelihood of those possible outcomes shall be considered. Examples of management’s intent and the corresponding treatment of the environmental exit costs in this Subtopic’s recoverability test are described below. (Environmental remediation costs discussed in certain of these cases refer to environmental remediation costs that have not yet been recognized as a liability pursuant to Subtopic 410-30.) This paragraph illustrates the guidance in paragraphs 360-10-35-29 through 35-35 on estimating future cash flows used to test a long-lived asset for recoverability.

Environmental Exit Costs That Shall Be Excluded From This Subtopic’s Recoverability Test

55-7 The following guidance demonstrates the consideration of restoration and environmental exit costs when testing a long-lived asset for impairment. In all of the following situations, environmental exit costs would be excluded from this Subtopic’s recoverability test.

Management Intends to Operate Asset, Future Cash Flows Exceed Carrying Amount, and No Expectation of Cash Outflow in Disposition

55-8 Management intends to operate the asset for at least the asset’s remaining depreciable life, the sum of the undiscounted future cash flows expected from the asset’s use during that period exceeds the asset’s carrying amount including any associated goodwill, and management has no reason to believe that the asset’s eventual disposition will result in a net cash outflow.

Management Expects to Operate Asset, Asset Generating Positive Cash Flows, Profitability Expected to Continue, and No Constraints on Economic Life

55-9 Management expects to operate the asset indefinitely and has the ability to do so, the asset is generating positive cash flows, management’s best information indicates that the asset will continue to be profitable in the future, and there are no known constraints to the asset’s economic life. This Subtopic’s recoverability test shall include the future cash outflows for repairs, maintenance, and capital expenditures necessary to obtain the future cash inflows expected to be generated by the asset based on its existing service potential.

Asset Has Finite Life but Remediation Costs Only Incurred if Asset Sold or Abandoned

55-10 The asset has a finite economic life, but environmental remediation costs will only be incurred if the asset is sold or abandoned. At the end of the asset’s life, management intends either to close the asset permanently because the costs of remediating the asset exceed the proceeds that likely would be received if the asset were sold or, alternatively, to idle the asset by reducing production to a minimal or nominal amount. (Although the environmental remediation costs are excluded from this Subtopic’s recoverability test, the recoverability test shall incorporate the entity’s own assumptions about its use of the asset. That is, the recoverability test shall consider the likelihood of the alternative courses of action [either closing or idling the asset] and the resulting cash flows associated with those alternative courses.)

Management Expects to Sell Asset and Remediation Costs Not Required

55-11 Management expects to sell the asset in the future, and the asset’s sale will not require the environmental remediation costs to be incurred. (Although the environmental remediation costs are excluded from this Subtopic’s recoverability test, the fair value of the asset is likely to be affected by the existence of those costs. The diminished fair value shall be considered in estimating the cash flows expected to arise from the eventual sale of the asset.)

Environmental Exit Costs That Shall Be Included in This Subtopic’s Recoverability Test

55-12 The following guidance demonstrates the consideration of restoration and environmental exit costs when testing a long-lived asset for impairment. In all of the following situations, environmental exit costs would be included in this Subtopic’s recoverability test.

Management Expects Remediation Costs to Be Incurred but Uncertainties Exist in Application of Laws

55-13 Management expects to take a future action related to the asset that may cause the environmental remediation costs to be incurred. However, uncertainties or inconsistencies exist in how the related laws or regulatory requirements are applied. Management estimates, based on the weight of the available evidence, a 60 percent chance that the remediation costs will not be incurred and a 40 percent chance that those costs will be incurred. Pursuant to this Subtopic, other situations may exist in which cash flows are estimated using a single set or best estimate of cash flows.

Useful Life Limited and Then Asset Disposition Required

55-14 The useful life of the asset is limited as a result of any of the following:

Actual or expected technological advances
Contractual provisions
Regulatory restrictions.

Also, when the asset’s service potential has ended, management will be required to dispose of the asset under paragraph 360-10-55-16 or 360-10-55-17.

Continuing Losses May Require Asset Disposition

55-15 The asset has a current period cash flow loss from operations combined with a projection or forecast that anticipates continuing losses. Management expects the asset to achieve profitability in the future but uncertainty exists about management’s ability to fund the future cash outflows up to the time that net cash inflows are expected from the asset’s use. In the event of a forced liquidation, management would likely dispose of the asset under the following paragraph or paragraph 360-10-55-17.

Intent to Abandon or Close an Asset

55-16 Management intends to abandon or close the asset in the future, and the event of abandonment or closure will cause the environmental remediation costs to be incurred.

Future Sale Will Require Remediation Costs to Be Incurred

55-17 Management intends to sell the asset in the future, and the applicable laws, regulations, or interpretations thereof require that appropriate environmental remediation (not within the scope of Subtopic 410-20) occur in connection with the sale.

Management Expects to Operate Asset and Retirement Costs to Be Incurred Over Its Life

55-18 Management expects to operate the asset for the remainder of its useful life. Related asset retirement costs are incurred over the life of the asset (for example, the operation of a landfill). Estimated cash flows associated with the asset retirement costs yet to be incurred and recognized shall be included in this Subtopic’s recoverability test.

For more information about the accounting for environmental obligations, see Deloitte’s Roadmap Environmental Obligations and Asset Retirement Obligations.

2.4.8 Assets Subject to Asset Retirement Obligations

ASC 360-10

35-18 In applying the provisions of this Subtopic, the carrying amount of the asset being tested for impairment shall include amounts of capitalized asset retirement costs. Estimated future cash flows related to the liability for an asset retirement obligation that has been recognized in the financial statements shall be excluded from both of the following:

The undiscounted cash flows used to test the asset for recoverability
The discounted cash flows used to measure the asset’s fair value.

35-19 If the fair value of the asset is based on a quoted market price and that price considers the costs that will be incurred in retiring that asset, the quoted market price shall be increased by the fair value of the asset retirement obligation for purposes of measuring impairment.

The initial liability for an asset retirement obligation is recognized, and a corresponding amount is added to the carrying amount of the related long-lived asset. The liability is adjusted in each period to reflect the passage of time (i.e., accretion expense) and any changes in the estimated future cash flows underlying the initial fair value measurement.

ASC 360-10-35-18 requires that “the carrying amount of the asset being tested for impairment . . . include amounts of capitalized asset retirement costs.” However, the asset retirement obligation liability should be excluded from the asset group. Accordingly, the estimates of future cash outflows associated with the asset retirement obligation liability should also be excluded from the impairment test. In addition, ASC 360-10 requires that an adjustment (an increase) be made to the fair value of the asset group if that fair value takes into account the costs that will be incurred in retiring that asset.

For more information about the accounting for asset retirement obligations, see Deloitte’s Roadmap Environmental Obligations and Asset Retirement Obligations.

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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.