4.2 Assets to Be Abandoned
ASC 360-10
Long-Lived Assets to
Be Abandoned
35-47 For purposes of this
Subtopic, a long-lived asset to be abandoned is disposed of
when it ceases to be used. If an entity commits to a plan to
abandon a long-lived asset before the end of its previously
estimated useful life, depreciation estimates shall be
revised in accordance with paragraphs 250-10-45-17 through
45-20 and 250-10-50-4 to reflect the use of the asset over
its shortened useful life (see paragraph 360-10-35-22).
35-48 Because the continued use of
a long-lived asset demonstrates the presence of service
potential, only in unusual situations would the fair value
of a long-lived asset to be abandoned be zero while it is
being used. When a long-lived asset ceases to be used, the
carrying amount of the asset should equal its salvage value,
if any. The salvage value of the asset shall not be reduced
to an amount less than zero.
Long-Lived Asset
Temporarily Idled
35-49 A long-lived asset that has
been temporarily idled shall not be accounted for as if
abandoned.
Under ASC 360-10-35-47, “a long-lived asset to be abandoned is
disposed of when it ceases to be used.” Therefore, an asset group may not be
classified as held for sale or reported in discontinued operations until it is
abandoned. Further, EITF Topic D-104 clarified that when “a component of an entity
will be abandoned through the liquidation or run-off of operations, that component
should not be reported as a discontinued operation in accordance with [ASC 205-20]
until all operations, including run-off operations, cease.” (While the guidance in
Topic D-104 was not codified, we believe that it continues to be relevant.) For
example, manufacturing equipment an entity expects to cease using after fulfilling a
backlog of orders is not considered abandoned while the entity is still using it. In
addition, ASC 360-10-35-49 points out that a “long-lived asset that has been
temporarily idled [is not] accounted for as if abandoned.”
Example 4-1
Classifying a Component
to Be Abandoned
On December 15, 20X6, Company M, a
calendar-year company, announced a plan to abandon the
operations of its Argentinean subsidiary, Company E. Company
M has determined that E represents a component of the entity
and that its abandonment will represent a strategic shift
that has (or will have) a major effect on M’s operations and
financial results. According to the plan of abandonment, E
would cease accepting new business as of December 31, 20X6.
Company M expects that E will be able to complete production
of all remaining orders by March 15, 20X7.
Because M’s plan is to abandon E (rather
than sell E), E’s assets and liabilities will remain
classified as held and used and E’s operations cannot be
presented in discontinued operations until abandonment
occurs. Because E will be fulfilling remaining orders until
March 15, 20X7, M would not classify E’s operations in
discontinued operations in its December 31, 20X6, financial
statements. However, as of December 15, 20X6, M may need to
revise its depreciation estimates in accordance with ASC
360-10-35-47 to reflect the use of E’s assets over their
shortened useful life. Company M may also need to test E’s
assets for recoverability because the plan to abandon E
indicates an expectation that, more likely than not, E’s
assets will be otherwise disposed of significantly before
the end of their previously estimated useful life (i.e., one
of the impairment indicators in ASC 360-10-35-21).
An entity that intends to abandon an asset group before the end of its previously
estimated useful life should revise its depreciation or amortization estimates in
accordance with the guidance on changes in estimate in ASC 250-20. The purpose of
such a revision is to reflect the use of the asset group over its shortened useful
life and a salvage value consistent with the decision to abandon. A decision to
abandon an asset is also an indicator of impairment; accordingly, in such
circumstances, an entity would be required to perform a recoverability test by using
cash flows related to its useful life that has now been shortened. In some cases,
the asset may still be recoverable and would not be impaired. Even if that is the
case, the entity would still need to consider revising future depreciation over the
shortened useful life.
Further, ASC 360-10-35-48 states:
Because the continued use of a long-lived asset demonstrates the presence of
service potential, only in unusual situations would the fair value of a
long-lived asset to be abandoned be zero while it is being used. When a
long-lived asset ceases to be used, the carrying amount of the asset should
equal its salvage value, if any. The salvage value of the asset shall not be
reduced to an amount less than zero.
However, there may be unusual circumstances in which an asset’s fair value
approximates zero (e.g., when the asset generates negative cash flows in operations
and cannot be disposed of for a positive salvage value). An entity that adjusts the
carrying value of an asset to zero should consider maintaining contemporaneous
documentation to support its conclusion.
In some cases, it may be difficult to determine whether an asset (or a group of
assets) is being disposed of by sale or by abandonment; an entity therefore may need
to use judgment in such situations. However, we believe that an entity’s intention
to sell an asset (or a group of assets) for scrap value indicates that the assets
are most likely being abandoned rather than sold.
For considerations related to cumulative translation adjustments in a foreign entity
that will be abandoned, see Section 5.5.2 of
Deloitte’s Roadmap Foreign Currency
Matters. For further details on a lessee’s abandonment of an ROU
asset, see Section 8.4.4.1 of Deloitte’s
Roadmap Leases.