8.8 Impairment Disclosures
Registrants often record impairments in connection with probable or
actual disposal transactions when an asset group is classified as held for sale, a
discontinued operation, or otherwise. In certain situations, SEC rules and
regulations require registrants to provide disclosures related to such impairments
in their filings (e.g., periodic or interim reports, registration statements). The
SEC staff also expects registrants to provide appropriate disclosures before
incurring a material impairment charge as well as about the specific events and
circumstances that led to the charge in the period of impairment. Through its filing
review process, the SEC staff may ask questions about the timing of impairment
testing when assets are classified as held for sale or are disposed of. For example,
the staff may ask whether assets that the registrant expects to sell or dispose of
were tested for impairment in prior periods.
8.8.1 Form 8-K Reporting Obligations for Material Impairment
Registrants must report a material impairment on a Form 8-K. Item 2.06 of Form
8-K requires a registrant to report a material impairment if it concludes that a
material charge for impairment to one or more of its assets is required under
GAAP. Item 2.06 states that the following information must be disclosed in the
Form 8-K:
(a) the date of the conclusion that a material charge is required
and a description of the impaired asset or assets and the facts and
circumstances leading to the conclusion that the charge for
impairment is required;
(b) the registrant’s estimate of the amount or range of amounts of
the impairment charge; and
(c) the registrant’s estimate of the amount or range of amounts of
the impairment charge that will result in future cash expenditures,
provided, however, that if the registrant determines that at the
time of filing it is unable in good faith to make a determination of
an estimate required by paragraphs (b) or (c) of this Item 2.06, no
disclosure of such estimate shall be required; provided further,
however, that in any such event, the registrant shall file an
amended report on Form 8-K under this Item 2.06 within four business
days after it makes a determination of such an estimate or range of
estimates.
In accordance with the instructions to Item 2.06, a registrant
is not required to file a Form 8-K under Item 2.06 if the conclusion is reached
in connection with (1) the preparation, review, or
audit of financial statements that must be included in the next periodic
Exchange Act report; (2) the periodic report is filed on a timely basis; and (3)
this conclusion is disclosed in the report. Further, as noted in Section 110,
Item 2.06, if an impairment conclusion is reached at a time
that coincides with, but is not in connection with, the preparation,
review, or audit of financial statements required to be included in the next
periodic Exchange Act report, an Item 2.06 Form 8-K is not required if the
aforementioned conditions within the instructions to Item 2.06 are
satisfied.
8.8.2 Early-Warning Disclosures
SEC Regulation S-K, Item 303(b)(2), requires registrants to
discuss in MD&A a known uncertainty — specifically, to disclose the
potential for a material impairment charge — in light of potential impairment
triggers (i.e., whether the registrant should have provided early-warning
disclosures about the possibility of an impairment charge in future periods to
help financial statement users understand these risks and how they could
potentially affect the financial statements). For example, in the real estate
industry, the SEC staff continues to request early-warning disclosures about
tenant difficulties that alert investors to the underlying conditions and risks
that a registrant faces before a material charge or decline in performance is
reported. In addition, the staff may use hindsight, after an impairment or
charge is reported (e.g., a material goodwill impairment charge), to inquire why
the registrant did not include any early-warning disclosures in prior periods
leading up to the reporting of such impairment. Such disclosures alert investors
to the underlying conditions and risks that the company faces before a material
charge or decline in performance is reported.
The SEC staff expects a registrant that has recorded, or is at risk for
recording, impairment charges to disclose the following:
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The adequacy and frequency of the registrant’s asset impairment tests, including the date of its most recent test.
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The factors or indicators (or both) used by management to evaluate whether the carrying value of other long-lived assets may not be recoverable.
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The methods and assumptions used in impairment tests, including how assumptions compare with recent operating performance, the amount of uncertainty associated with the assumptions, and the sensitivity of the estimate of the fair value of the assets to changes in the assumptions.
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The registrant’s conclusions regarding its asset groupings.
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The timing of the impairment, especially if events that could result in an impairment had occurred in periods before the registrant recorded the impairment.
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The types of events that could result in impairments.
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In the critical accounting estimates section of MD&A, the registrant’s process for assessing impairments.
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The facts and circumstances that led to the impairments. A registrant should also consider disclosing in MD&A risks and uncertainties associated with the recoverability of assets in the periods before an impairment charge is recorded. For example, even if an impairment charge is not required, a reassessment of the useful life over which depreciation or amortization is being recognized may be appropriate.
See Section
2.11 of Deloitte’s Roadmap SEC Comment Letter Considerations, Including
Industry Insights for further details. In addition, see
Section
9510 of the FRM for discussion of goodwill impairment
disclosures expected by the SEC staff.