2.6 Adjusted Carrying Amount Becomes New Cost Basis
ASC 360-10
35-20
If an impairment loss is recognized, the adjusted carrying
amount of a long-lived asset shall be its new cost basis.
For a depreciable long-lived asset, the new cost basis shall
be depreciated (amortized) over the remaining useful life of
that asset. Restoration of a previously recognized
impairment loss is prohibited.
When an impairment loss is recognized, it is recognized as an adjustment to the cost
basis of the asset. Entities may not reverse impairment losses on assets classified
as held and used even if the value of the assets subsequently increases.
While the term “new cost basis” is not defined, we believe that it
suggests that any previously recognized accumulated depreciation or amortization should be eliminated against the carrying amount of the asset when an impairment loss is recognized for the asset. This is supported by paragraph B34 of the Background Information and Basis for Conclusions of FASB Statement 144, which notes
that “a decision to continue to use the impaired asset is equivalent to a new asset
purchase decision, and a new basis of fair value is appropriate.” Therefore, the new
cost basis of an asset is its cost basis just before the recognition of the
impairment loss less (1) the accumulated depreciation or amortization to date and
(2) the impairment loss allocated to the asset.
Example 2-3
Entity A, which has an asset with an
original cost of $250 and accumulated depreciation of $50,
recognizes an impairment loss of $25 for the asset. The new
cost basis of the asset after A recognizes the impairment
less is as follows:
However, in the absence of specific guidance, there may be diversity
in practice related to eliminating the previously recognized accumulated
depreciation or amortization.
Future depreciation or amortization of the asset is estimated
according to its new cost basis (less salvage value) and remaining useful life.
Future accumulated depreciation or amortization equals the depreciation or
amortization expense that will be recognized after the impairment.
However, for entities that are subject to cost-based regulation and apply ASC 980,
original historical cost is a key measure for determining regulated rates that may
be charged. Accordingly, rate-regulated enterprises may be directed by their
regulators to retain original historical cost for an impaired asset and to charge
the impairment loss directly to accumulated depreciation. SEC Regulation S-X, Rule
5-02(13)(b), states:
Tangible and intangible utility plant[s] of a public utility
company shall be segregated so as to show separately the original cost, plant
acquisition adjustments, and plant adjustments, as required by the system of
accounts prescribed by the applicable regulatory authorities. This rule shall
not be applicable in respect to companies which are not required to make such a
classification.
Moreover, abandonments and disallowances of plant costs accounted for under ASC
980-360 are outside the scope of ASC 360-10. Entities that recognize impairment
losses on assets subject to cost-based regulation should consider consulting with
their independent auditors.
Bridging the GAAP
If an impairment loss has been recognized for an asset other
than goodwill (or a CGU), IAS 36 requires that an entity reevaluate the
recoverable amount of the asset (CGU) to determine whether an impairment
loss recognized in a prior period no longer exists. If the recoverable
amount of an asset (CGU) has increased since the impairment loss was
recognized, the entity is required to increase the value of the asset (CGU)
to its current recoverable amount. Therefore, the previously recognized
impairment charge would be reversed to profit or loss.