3.5 Measuring the Carrying Value of a Disposal Group Upon Classification as Held for Sale

This order ensures that the carrying amounts of any assets that are impaired are adjusted before the carrying amount of the disposal group is determined. The assets that are outside the scope of ASC 360-10 are expected to be routinely assessed for impairment in accordance with applicable GAAP even before they are classified as held for sale. However, in performing this step, an entity must consider whether it would be required to recognize an impairment as a result of any changes in facts or circumstances. The process for testing assets for impairment does not change when such assets are included in a disposal group; however, expectations about the amount to be obtained as part of the sale transaction for the disposal group may serve as additional evidence of an asset’s value.

If the disposal group is itself a reporting unit, the goodwill of the reporting unit is assigned to the disposal group in accordance with ASC 350-20-40-1. In such cases, the entity should consider whether a triggering event has occurred that requires the entity to test the reporting unit’s goodwill for impairment in between annual testing dates. Any impairment is recognized as it normally would be under ASC 350-20.

Under ASC 350-20-40-2, if the disposal group is a portion of a reporting unit that meets the definition of a business, any goodwill associated with that business must be assigned to the disposal group. ASC 350-20-40-3 through 40-6 provide guidance on determining the amount to include in the disposal group, but the amount is generally determined on a relative fair value basis. Because the goodwill has been taken out of the larger reporting unit and the disposal group may be a smaller unit of account, an entity should assess whether there is an indicator that goodwill assigned to the disposal group is impaired. That is, once goodwill is assigned to a disposal group, the disposal group effectively becomes its own reporting unit and is assessed for impairment.1 Any impairment is recognized as it normally would be under ASC 350-20. ASC 350-20-40-7 also requires that the entity consider whether the goodwill remaining in the portion of the reporting unit to be retained is impaired.

After completing the above assessments, the entity then compares the carrying amount of the disposal group with its fair value less costs to sell and recognizes an impairment for the excess. At this point, the disposal group is the unit of account. As discussed further in Section 3.5, the entity would not write down or impair individual assets in the disposal group; rather, the entity would recognize a valuation allowance to adjust the carrying amount of the disposal group to its fair value less costs to sell.

The entity should keep in mind that the order for testing when a disposal group is classified as held for sale differs for long-lived assets and goodwill when an asset group is classified as held and used (see Section 2.3.7).

 

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. As a result, a private company or NFP that has adopted ASU 2021-03 would not assess goodwill for triggering events until the end of its next reporting period.

See Section 2.5.1 for an overview of the principles of ASC 820. For more detailed information about measuring fair value, see Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option).

ASC 360-10-35-38 states, in part, that “[c]osts to sell are the incremental direct costs to transact a sale, that is, the costs that result directly from and are essential to a sale transaction and that would not have been incurred by the entity had the decision to sell not been made.” Examples of costs to sell include legal and other professional fees, broker fees, and title transfer fees. Costs to sell do not include costs that would have been incurred if the assets were not sold, such as rent, insurance, utilities, or security services. Costs to sell also do not include costs that are within the scope of ASC 420-10, such as one-time termination benefits, lease termination costs, facility closing costs, and employee relocation costs. In addition, upon sale of a disposal group, an entity may repay debt secured by the assets of the disposal group. Regardless of whether the entity was required, or chose, to extinguish the debt, we do not believe that any extinguishment gains or losses or prepayment penalties should be included in the costs to sell since such amounts are related to how the entity finances its operations and are not a cost of selling the disposal group.

Recognition of a disposal group at the lower of its carrying amount or fair value less costs to sell may result in the recognition of costs to sell in the entity’s statement of operations before such costs would have otherwise been incurred. For example, assume that an entity expects to sell a disposal group with a $10 carrying amount for $9 to be received from the buyer while incurring $1 to sell in the form of professional services to be received in the future to facilitate the disposal. In this example, the entity would record a $2 loss upon classifying the disposal group as held for sale and would recognize the $2 as a valuation allowance or contra asset (see Section 3.5). When the costs to sell are paid, the payment would reduce the valuation allowance or contra asset, thereby increasing the carrying amount of the disposal group in such a way that the carrying amount would equal the expected amount to be received from the buyer at the time of sale. If, however, the entity expects to recognize a gain from the sale of the disposal group, any costs to sell would be expensed as incurred.

ASC 360-10 does not require entities to record a loss in excess of the carrying amount of the long-lived assets within the group. Paragraph B92 of the Background Information and Basis for Conclusions of FASB Statement 144 stated, in part:

In prepared remarks at the 2008 AICPA Conference on Current SEC and PCAOB Developments, Adam Brown, a professional accounting fellow in the SEC’s Office of the Chief Accountant, addressed this scenario, stating, in part:

An entity should consider whether all necessary impairments have been taken on the other assets and whether any specialized accounting may prevent the entity from recording the loss at the time the disposal group is tested for impairment. Further, an entity should consider other accounting literature (e.g., ASC 450-20) to determine whether it has incurred a liability that may have to be accrued.

An entity acquiring a business may intend to sell some of its long-lived assets shortly after the acquisition date. ASC 805-20-30-22 requires an acquirer to “measure an acquired long-lived asset (or disposal group) that is classified as held for sale at the acquisition date in accordance with Subtopic 360-10, at fair value less cost to sell in accordance with paragraphs 360-10-35-38 and 360-10-35-43.” ASC 360-10-45-12 requires entities to classify a newly acquired long-lived asset or disposal group as held for sale as of the acquisition date if both of the following conditions are met:

• “[I]f the one-year requirement in paragraph 360-10-45-9(d) is met (except as permitted by [paragraph 360-10-45-11]).”
• “[A]ny other criteria in paragraph 360-10-45-9 that are not met at [the acquisition] date are probable of being met within a short period following the acquisition (usually within three months).”

Accordingly, as specified in ASC 360-10-45-12, the acquirer must satisfy the one-year criterion in ASC 360-10-45-9(d) as of the acquisition date, but it can satisfy the other criteria in ASC 360-10-45-9 if they “are probable of being met within a short period following the acquisition (usually within three months).” If the long-lived asset or disposal group cannot be classified as held for sale, the assets and liabilities would be measured in accordance with the requirements in ASC 805 (i.e., generally at fair value). See Section 5.6 for information about discontinued-operations reporting related to a newly acquired business or nonprofit activity.