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 group 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 the asset group’s useful life that has now been
shortened. In some cases, the asset group 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.
In the unusual circumstance in which an asset that is still being
used has a fair value that 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 should provide contemporaneous documentation regarding the
considerations supporting its conclusion to adjust the asset to zero before
abandonment.
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.