Deloitte's Roadmap: Impairments and Disposals of Long-Lived Assets and Discontinued Operations
Preface
Preface
We are pleased to present the 2024 edition of Impairments and
Disposals of Long-Lived Assets and Discontinued Operations. This Roadmap
provides Deloitte’s insights into the guidance in ASC 360-101 and ASC 205-20 on impairments and disposals of long-lived assets and
presentation of discontinued operations. ASC 360-10 specifies the accounting and
reporting for long-lived assets that are being held and used by an entity and for
long-lived assets that the entity intends to sell or otherwise dispose of. ASC
205-20 further provides guidance on when a component, or group of components, of an
entity that is classified as held for sale or disposed of must be reported as a
discontinued operation.
The body of this Roadmap combines the guidance in ASC 360-10 and ASC
205-20 on accounting and reporting for long-lived assets — as well as that on the
presentation of disposals that both do and do not qualify for
discontinued-operations reporting — with Deloitte’s interpretations and examples in
a comprehensive, reader-friendly format. Further, the table of contents is a helpful
navigational tool, providing links to topics and interpretations.
The 2024 edition of this Roadmap includes updated and expanded
guidance. For a summary of key changes made to this Roadmap since publication of the
2023 edition, see Appendix
D.
Be sure to check out On the
Radar (also available as a stand-alone publication),
which briefly summarizes emerging issues and trends related
to the accounting and financial reporting topics addressed
in the Roadmap.
We hope that you find this publication a valuable resource when
accounting and reporting for disposals of long-lived assets and discontinued
operations.
Footnotes
1
For a list of the titles of standards and other literature
referred to in this publication, see Appendix B. For a list of
abbreviations used in this publication, see Appendix C.
On the Radar
On the Radar
The convergence of various macroeconomic and geopolitical factors
has created a volatile and uncertain environment in which a business’s ability to
forecast results and make decisions can be difficult. Factors that have contributed
to such challenges include interest rate changes, inflation, and a tight labor
market, which together have contributed to bank failures or downgrades, businesses’
struggles to raise capital, companies’ announcements of layoffs, broader
restructuring plans, and changes in customer behavior. Further, the ways in which
people are living and working in the post-pandemic environment have significantly
affected real estate demands and preferences.
How these factors affect cash flow and fair value estimates used in
impairment analyses should be considered. As businesses evolve in response to these
conditions, preparers may also need to make determinations pertaining to (1) assets
held for sale and (2) reporting discontinued operations. Even as entities evolve in
times of relative stability, they must consider the reporting for impairments and
disposals.
Long-lived assets within the scope of ASC 360-10 are accounted for
and tested for impairment differently depending on the entity’s intent regarding the
assets. Long-lived assets that the entity intends to hold and use in its operations,
including long-lived assets that the entity intends to abandon, distribute to
owners, or exchange in a nonmonetary transaction accounted for at carrying amount,
are tested for impairment when a triggering event occurs by performing a two-step
recoverability test. In the two-step recoverability test, the carrying amount of an
asset group is first compared with its undiscounted cash flows to determine whether
an asset is recoverable. If the held-and-used asset group is determined not to be
recoverable, the asset group is written down to fair value. By contrast, long-lived
assets that the entity intends to sell are tested for impairment upon classification
as held for sale and in each subsequent reporting period by comparing their carrying
amount with their fair value less costs to sell.
The flowchart below summarizes how
long-lived assets are accounted for and presented on the basis of the entity’s
intent regarding the assets.
Long-Lived Assets Classified as Held and Used
Long-lived assets that are classified as held and used are tested for
recoverability upon the occurrence of a triggering event, which is an event or
change in circumstance that indicates that their carrying amount may not be
recoverable. When performing a recoverability test, an entity groups long-lived
assets with other assets and, possibly, liabilities at the lowest level for
which the entity can identify cash flows that are largely independent of the
cash flows of other assets and liabilities. Such a grouping is called an asset
group.
An asset group is not recoverable if its carrying amount is in excess of the sum
of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset group. When an asset group is not recoverable, the next
step is to measure an impairment loss as the amount by which the carrying amount
of the asset group exceeds its fair value.
Long-Lived Assets to Be Disposed of by Sale
An entity may decide to sell one or more of its long-lived assets. Long-lived
assets are grouped with the other assets and liabilities the entity intends to
sell. Such a grouping is called a disposal group. Once all of the held-for-sale
classification criteria are met, an entity classifies the disposal group as held
for sale, stops depreciating or amortizing the long-lived assets, and measures
the disposal group at the lower of its carrying amount or fair value less cost
to sell. The entity recognizes a loss, if any, to adjust the carrying amount of
the disposal group to its fair value less cost to sell in the period in which
the held-for-sale criteria are met and in each subsequent period until the
disposal group is sold. Therefore, the carrying amount of the disposal group is
adjusted for subsequent increases or decreases in its fair value less cost to
sell, except that any subsequent increase cannot exceed the cumulative loss
previously recognized. Any gain or loss from the sale of the disposal group not
previously recognized is recognized on the date of sale.
Long-Lived Assets to Be Disposed of Other Than by Sale
An entity may also dispose of one or more long-lived assets before the end of
their previously estimated useful life by, for example, abandoning them,
exchanging them in a transaction accounted for at carrying amount, or
distributing them to owners in a spin-off. Assets to be disposed of other than
by sale should continue to be classified as held and used until they are
disposed of.
Presentation and Disclosure Requirements for Long-Lived Assets That Are Classified as Held for Sale or Have Been Disposed Of
Once long-lived assets have been classified as held for sale or
have been disposed of, an entity must determine how to present the disposition
in its financial statements. The entity must first assess whether the
disposition meets the criteria for discontinued-operations reporting. The
purpose of reporting discontinued operations separately from continuing
operations is to provide stakeholders with information about assessing the
effects of a disposal on an entity’s ongoing operations. The operations of a
disposal group may be presented as a discontinued operation only if (1) the
disposed-of assets (and liabilities) represent a component of an entity, (2) the
assets (and liabilities) meet the held-for-sale classification criteria or have
been disposed of, and (3) the disposal represents a strategic shift that has or
will have a major effect on an entity’s operations and financial results.
Therefore, not all disposals qualify for discontinued-operations reporting.
The disclosure requirements differ depending on whether a disposal (1) meets the
criteria for discontinued-operations reporting, (2) does not meet the criteria
for discontinued-operations reporting but is (or includes) an individually
significant component of the entity, or (3) does not meet the criteria for
discontinued-operations reporting and is not (or does not include) an
individually significant component of the entity. Entities will need to use
judgment in interpreting the meaning of the term “individually significant,”
since this term is not defined. The table below summarizes the disclosure
requirements.
If the disposition:
| |
---|---|
Meets the criteria for discontinued-operations
reporting
|
The results of operations are reclassified to
discontinued operations in the statement of operations,
retrospectively, for all periods presented.
In addition, the assets and liabilities
of the disposal group are presented separately on the
face of the balance sheet both in the current
period (if held for sale) and in all prior periods.
|
Does not meet the criteria for discontinued-operations
reporting but is an individually significant
component
|
No reclassification of results of operations in the
statement of operations.
The assets and liabilities of the
disposal group are separately presented on the face of
the balance sheet only in the initial period in
which the group is classified as held for sale. The
entity should not reclassify prior-period balance
sheets. As a result, if a disposal group is sold in the
same period in which it is classified as held for sale,
the assets and liabilities would not be separately
presented in the balance sheet.
Entities must disclose information required by ASC
360-10-50-3A about pretax profit or loss if the disposal
group includes an individually significant component and
does not qualify for discontinued-operations reporting.
If an individually significant component includes a
noncontrolling interest, the pretax profit or loss
attributable to the parent must also be disclosed.
|
Does not meet the criteria for discontinued-operations
reporting and is not an individually significant
component
|
Same presentation and disclosure requirements as for
individually significant components except that the
entity is not required to disclose information about
pretax profit or loss in accordance with ASC
360-10-50-3A.
|
Considerations for SEC Registrants
For disposals reported as discontinued operations, SEC registrants must consider
the impact of the retrospective change on the historical financial statements
included in their Exchange Act reports (e.g., Forms 10-K and 10-Q) and in
registration statements under the Securities Act (e.g., registration statements
on Form S-3) and other nonpublic offerings. Registrants may also be required to
report a disposition, including certain disposals that do not qualify as
discontinued operations, on a Form 8-K and provide pro forma financial
information that gives effect to the disposition. Further, registrants must
consider the impact the revised financial statements may have on other SEC
requirements (e.g., SEC Regulation S-X, Rules 3-05, 3-09, 4-08(g), and
3-10).
This Roadmap provides Deloitte’s
insights into the guidance in ASC 360-10 and ASC 205-20
on impairments and disposals of long-lived assets and
presentation of discontinued operations.
Contacts
Contacts
|
Christine Mazor
Audit &
Assurance
Partner
Deloitte & Touche
LLP
+1 212 436 6462
|
|
Matt Himmelman
Audit &
Assurance
Partner
Deloitte & Touche
LLP
+1 714 436 7277
|
|
Ignacio Perez
Audit &
Assurance
Managing Director
Deloitte & Touche
LLP
+1 203 761 3379
|
Mark Strassler
Audit &
Assurance
Managing Director
Deloitte & Touche
LLP
+1 415 783 6120
| |
|
James Webb
Audit &
Assurance
Partner
Deloitte & Touche
LLP
+1 415 783 4586
|
|
Andy Winters
Audit &
Assurance
Partner
Deloitte & Touche
LLP
+1 203 761 3355
|
For information about Deloitte’s offerings on disposals of
long-lived assets and discontinued operations, please contact:
Jamie Davis
Audit &
Assurance
Partner
Deloitte & Touche
LLP
+1 312 486 0303
|
Chapter 1 — Overview and Scope
Chapter 1 — Overview and Scope
1.1 Overview
In August 2001, the FASB issued Statement
144, which provided accounting and
reporting guidance on long-lived assets to be (1)
held and used, (2) disposed of by sale, and (3) disposed of other than by sale. FASB Statement 144
also provided accounting and reporting guidance on
discontinued operations and broadened the
presentation to include more disposal transactions
than previous guidance. The guidance in Statement
144 was subsequently codified into ASC 360-10 and
ASC 205-20.
Further, in April 2014, the FASB issued ASU 2014-08, which elevated the threshold
for presenting a disposal transaction as a discontinued operation. The FASB issued
this ASU partly in response to stakeholder feedback that “under current guidance too
many disposals of assets qualify for discontinued operations presentation, resulting
in financial statements that are less decision useful for users and higher costs for
preparers.” Under the revised guidance, an entity presents a disposal as a
discontinued operation if it “represents a strategic shift that has (or will have) a
major effect on an entity’s operations and financial results” or is “a business or
nonprofit activity that, on acquisition, meets the criteria . . . to be classified
as held for sale.” The guidance in ASU 2014-08 replaced the previous guidance in ASC
205-20 on reporting discontinued operations.
1.2 Overview of the Accounting and Reporting for Long-Lived Assets and Discontinued Operations
Long-lived assets within the scope of ASC 360-10 are accounted for
and tested for impairment differently depending on the entity’s intent with regard
to the assets. Long-lived assets that the entity intends to hold and use in its
operations, including long-lived assets that the entity intends to abandon,
distribute to owners, or exchange in a nonmonetary transaction that is accounted for
at the assets’ carrying amount, are tested for impairment when a triggering event
occurs by using a two-step recoverability test. By contrast, long-lived assets that
the entity intends to sell are tested for impairment upon classification as held for
sale and in each subsequent reporting period by comparing their carrying amount with
their fair value less costs to sell.
The flowchart below summarizes how
long-lived assets are accounted for and presented on the basis of the entity’s
intent regarding the assets (also included are references to where additional
information can be found).
1.2.1 Long-Lived Assets Classified as Held and Used
Under ASC 360-10-35-21, long-lived assets that are classified as
held and used “shall be tested for recoverability whenever events or changes in
circumstances indicate that [their] carrying amount may not be recoverable.” In
addition, ASC 360-10-35-23 indicates that such assets “shall be grouped with
other assets and liabilities at the lowest level for which identifiable cash
flows are largely independent of the cash flows of other assets and
liabilities.”
In accordance with ASC 360-10-35-17, a long-lived asset (asset
group) is not recoverable if its carrying amount “exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual disposition
of the asset (asset group).” When a long-lived asset (asset group) is not
recoverable, it is necessary to determine its fair value since “[a]n impairment
loss shall be measured as the amount by which the carrying amount of a
long-lived asset (asset group) exceeds its fair value.”
See Chapter
2 for more information about the accounting for and presentation
of long-lived assets classified as held and used.
1.2.2 Long-Lived Assets to Be Disposed of by Sale
All the criteria in ASC 360-10-45-9 must be met for a long-lived
asset (disposal group) to be classified as held for sale. Once these criteria
are met, the long-lived asset (disposal group) is measured at the lower of its
carrying amount or fair value less cost to sell. The entity recognizes a loss,
if any, to adjust the carrying amount of the long-lived asset (disposal group)
to its fair value less cost to sell in the period in which the held-for-sale
criteria are met and in each subsequent period until the long-lived asset
(disposal group) is sold. Therefore, the carrying amount of the long-lived asset
(disposal group) is adjusted for subsequent increases or decreases in its fair
value less cost to sell, except that any subsequent increase cannot exceed the
cumulative loss previously recognized. Any gain or loss from the sale of a
long-lived asset (disposal group) not previously recognized is recognized on the
date of sale. In addition, long-lived assets are not depreciated or amortized
while they are classified as held for sale.
See Chapter 3 for more information about
the accounting for and presentation of long-lived assets to be disposed of by
sale.
1.2.3 Long-Lived Assets to Be Disposed of Other Than by Sale
An entity may dispose of one or more long-lived assets before
the end of their previously estimated useful life by, for example, abandoning
them, exchanging them in a transaction accounted for at their carrying amount,
or distributing them to owners in a spin-off. Assets to be disposed of other
than by sale should continue to be classified as held and used until they are
disposed of. Upon disposal, an entity must assess whether the disposed-of assets
qualify for discontinued-operations reporting. If so, the entity should apply
the presentation and disclosure requirements in ASC 205-20. If not, the entity
should apply the presentation and disclosure requirements in ASC 360-10.
See Chapter 4 for more information about
the accounting for and presentation of long-lived assets to be disposed of other
than by sale.
1.2.4 Discontinued Operations
The purpose of reporting discontinued operations separately from
continuing operations is to provide stakeholders with information on assessing
the effects of a disposal on an entity’s ongoing operations. The operations of a
disposal group may only be presented as a discontinued operation once the assets
(and liabilities) meet the criteria to be classified as held for sale, have been
sold, or have been otherwise disposed of (e.g., abandonment) and only if the
disposal represents a strategic shift that has or will have a major effect on an
entity’s operations and financial results. Therefore, not all disposal
transactions qualify for discontinued-operations reporting.
See Chapter
5 for more information about assessing whether a disposal
qualifies for discontinued-operations reporting.
1.2.5 Presentation and Disclosure Requirements for Disposals That Are Not Discontinued Operations
ASC 360-10-45-14 states, in part, that a “long-lived asset
classified as held for sale (but not qualifying for presentation as a
discontinued operation in the statement of financial position in accordance with
paragraph 205-20-45-10) shall be presented separately in the statement of
financial position of the current period.” The presentation and disclosure
requirements for a long-lived asset (disposal group) that is classified as held
for sale, or that has been disposed of but does not qualify for
discontinued-operations reporting, differ depending on whether the disposal is
an individually significant component of an entity. An entity will need to use
judgment in interpreting the term “individually significant” since it is not
defined.
See Chapter 6 for more information about the presentation
and disclosure requirements for disposals that do not qualify as discontinued
operations.
1.2.6 Presentation and Disclosure Requirements for Disposals That Are Discontinued Operations
If the criteria for discontinued-operations reporting are met,
the results of operations of the component that is classified as held for sale
or that has been sold or otherwise disposed of, including any gain or loss
recognized, should be reported as discontinued operations in the statement of
operations, retrospectively, for all periods presented. In addition, ASC
205-20-45-10 states, in part, that “[i]n the period(s) that a discontinued
operation is classified as held for sale and for all prior periods presented,
the assets and liabilities of the discontinued operation shall be presented
separately in the asset and liability sections, respectively, of the statement
of financial position.”
See Chapter 7 for more information about
the presentation and disclosure requirements for disposals that qualify as
discontinued operations.
1.2.7 Reporting Considerations for SEC Registrants
In the period in which a component meets the criteria to be presented as a
discontinued operation, a registrant must present the component as a
discontinued operation for all periods presented. Accordingly, SEC registrants
must consider the impact of the retrospective change on the historical financial
statements included in their Exchange Act reports (e.g., Forms 10-K and 10-Q)
and in registration statements under the Securities Act (e.g., registration
statements on Form S-3) and other nonpublic offerings. Registrants may also be
required to report a disposition, including certain disposals that do not
qualify as discontinued operations, on a Form 8-K and provide pro forma
financial information that gives effect to the disposition. Further, registrants
must consider the impact the revised financial statements may have on other SEC
requirements (e.g., SEC Regulation S-X, Rules 3-05, 3-09, 4-08(g), and
3-10).
See Chapter
8 for more information about the reporting considerations for SEC
registrants.
1.3 Scope of ASC 360-10 — Impairment or Disposal of Long-Lived Assets
ASC 360-10
05-4 The
Impairment or Disposal of Long-Lived Assets Subsections
provide guidance for:
- Recognition and measurement of the impairment of long-lived assets to be held and used
- Measurement of long-lived assets to be disposed of by sale
- Disclosures about the impairment or disposal of long-lived assets and disposals of individually significant components of an entity.
05-5 For
long-lived assets disposed of or classified as held for
sale, different presentation and disclosures are required
depending on the nature of the disposal. If the long-lived
assets are a significant component of an entity, more
extensive disclosures are required. Additionally, if the
component of an entity meets the definition of discontinued
operation in paragraph 205-20-45-1B, an entity shall refer
to Subtopic 205-20 for the presentation and disclosure
requirements for discontinued operations (see the flowchart
in paragraph 360-10-55-18A for an illustration).
15-4 The guidance in the Impairment
or Disposal of Long-Lived Assets Subsections applies to the
following transactions and activities:
- Except as indicated in (b) and the
following paragraph, all of the transactions and
activities related to recognized long-lived assets
of an entity to be held and used or to be disposed
of, including:
- Right-of-use assets of lessees
- Long-lived assets of lessors subject to operating leases
- Proved oil and gas properties that are being accounted for using the successful-efforts method of accounting
- Long-term prepaid assets.
- The following transactions and
activities related to assets and liabilities that
are considered part of an asset group or a disposal
group:
- If a long-lived asset (or assets) is part of a group that includes other assets and liabilities not covered by the Impairment or Disposal of Long-Lived Assets Subsections, the guidance in the Impairment or Disposal of Long-Lived Assets Subsections applies to the group. In those situations, the unit of accounting for the long-lived asset is its group. For a long-lived asset or assets to be held and used, that group is referred to as an asset group. For a long-lived asset or assets to be disposed of by sale or otherwise, that group is referred to as a disposal group. Examples of liabilities included in a disposal group are legal obligations that transfer with a long-lived asset, such as certain environmental obligations, and obligations that, for business reasons, a potential buyer would prefer to settle when assumed as part of a group, such as warranty obligations that relate to an acquired customer base.
- The guidance in the Impairment or Disposal of Long-Lived Assets Subsections does not change generally accepted accounting principles (GAAP) applicable to those other individual assets (such as accounts receivable and inventory) and liabilities (such as accounts payable, long-term debt, and asset retirement obligations) not covered by the Impairment or Disposal of Long-Lived Assets Subsections that are included in such groups.
15-5
The guidance in the Impairment or Disposal of Long-Lived
Assets Subsections does not apply to the following
transactions and activities:
- Goodwill
- Intangible assets not being amortized that are to be held and used
- Servicing assets
- Financial instruments, including investments in equity securities accounted for under the cost or equity method
- Deferred policy acquisition costs
- Deferred tax assets
- Unproved oil and gas properties that are being accounted for using the successful-efforts method of accounting
- Oil and gas properties that are accounted for using the full-cost method of accounting as prescribed by the Securities and Exchange Commission (SEC) (see Regulation S-X, Rule 4-10, Financial Accounting and Reporting for Oil and Gas Producing Activities Pursuant to the Federal Securities Laws and the Energy Policy and Conservation Act of 1975)
- Certain other long-lived assets for which the
accounting is prescribed elsewhere in the
standards:
- For guidance on financial reporting in the record and music industry, see Topic 928.
- For guidance on financial reporting in the broadcasting industry, see Topic 920.
- For guidance on accounting for the costs of computer software to be sold, leased, or otherwise marketed, see Subtopic 985-20.
- For guidance on accounting for abandonments and disallowances of plant costs for regulated entities, see Subtopic 980-360.
15-6 Entities
that hold collections shall follow the accounting and
disclosure requirements in Subtopic 958-360 on
not-for-profit entities — property, plant, and
equipment.
ASC 360-10 addresses the impairment or disposal of long-lived assets
and applies to all entities. ASC 360-10 applies to individual long-lived assets as
well as groups of assets (and possibly liabilities) that include one or more
long-lived assets. Once an entity adopts ASC 842, the impairment guidance in ASC
360-10 also applies to a lessee’s right-of-use (ROU) assets for both operating and
finance leases (see Section
2.3.4).
ASC 360-10-15-5 lists a number of assets (e.g., servicing assets,
deferred policy acquisition costs, costs of computer software to be sold) that are
outside the scope of the guidance in the subsections on impairment or disposal of
long-lived assets. The impairment of those assets is addressed by other GAAP. These
scope exclusions apply only to the assets for which the accounting is prescribed by
other GAAP, not to the entire entity with those assets. As a result, an entity may
account for some assets in accordance with other GAAP and others in accordance with
ASC 360-10. In addition, entities within the scope of ASC 970 should consider the
guidance in ASC 970-360 and ASC 970-340.
ASC 360-10-05-5 clarifies that ASC 360-10 applies to the accounting
for disposals of long-lived assets. If the disposal meets the definition of a
discontinued operation, an entity must apply the presentation and disclosure
requirements in ASC 205-20; if the disposal does not meet the definition of a
discontinued operation, an entity must apply the presentation and disclosure
requirements in ASC 360-10. The disclosure requirements an entity needs to apply
under ASC 360-10 differ depending on the significance of the disposal.
1.4 Scope of ASC 205-20 — Presenting Discontinued Operations
ASC 205-20
05-1 This
Subtopic provides guidance on the presentation and
disclosure requirements for discontinued operations. A
discontinued operation may include a component of an entity
or a group of components of an entity, or a business or
nonprofit activity.
15-1 This
Subtopic follows the same Scope and Scope Exceptions as
outlined in the Overall Subtopic; see Section 205-10-15,
with specific transaction qualifications noted below.
15-2 The
guidance in this Subtopic applies to either of the
following:
- A component of an entity or a group of components of an entity that is disposed of or is classified as held for sale
- A business or nonprofit activity that, on acquisition, is classified as held for sale.
Pending Content (Transition
Guidance: ASC 805-60-65-1)
15-2 The guidance in this Subtopic
applies to either of the following:
-
A component of an entity or a group of components of an entity that is disposed of or is classified as held for sale
-
A business or nonprofit activity that, on acquisition or upon formation of a joint venture, is classified as held for sale.
15-3 The
guidance in this Subtopic does not apply to oil and gas
properties that are accounted for using the full-cost method
of accounting as prescribed by the U.S. Securities and
Exchange Commission (SEC) (see Regulation S-X, Rule 4-10,
Financial Accounting and Reporting for Oil and Gas Producing
Activities Pursuant to the Federal Securities Laws and the
Energy Policy and Conservation Act of 1975).
ASC 205-10
05-3 The Discontinued Operations
Subtopic discusses the conditions under which either of the
following would be reported in an entity’s financial
statements as a discontinued operation:
- A component of an entity that either has been disposed of or is classified as held for sale
- A business or nonprofit activity that, on acquisition, is classified as held for sale.
Pending Content (Transition
Guidance: ASC 805-60-65-1)
05-3
The Discontinued Operations Subtopic discusses the
conditions under which either of the following
would be reported in an entity’s financial
statements as a discontinued operation:
-
A component of an entity that either has been disposed of or is classified as held for sale
-
A business or nonprofit activity that, on acquisition or upon formation of a joint venture, is classified as held for sale.
05-3A If a
component of an entity that either has been disposed of or
is classified as held for sale does not meet the conditions
to be reported in discontinued operations, Section 360-10-45
on other presentation matters of property, plant, and
equipment provides guidance on presenting disposal gains and
losses and impairment losses on assets classified as held
for sale.
15-2 The
guidance in the Presentation of Financial Statements Topic
applies to business entities and not-for-profit entities
(NFPs).
ASC 205-20 applies to all businesses and not-for-profit entities
(NFPs). ASC 205-20 applies to a component, or group of components, of an entity or a
newly acquired business or nonprofit activity that meets the held-for-sale criteria
upon acquisition. A component of an entity “comprises operations and cash flows that
can be clearly distinguished . . . from the rest of the entity.” Unlike a disposal
group, a component of an entity does not need to include long-lived assets. For
example, an equity method investment is a financial instrument and is not within the
scope of ASC 360-10 but could qualify for discontinued-operations reporting under
ASC 205-20. If so, an entity would apply the held-for-sale criteria and
discontinued-operations reporting guidance in ASC 205-50 for the disposal of an
equity method investment.
ASC 205-20 includes a scope exception for oil and gas properties
that use the full-cost method of accounting. Paragraphs BC27 and BC28 of ASU 2014-08
explain the FASB’s reasoning behind retaining this exception:
BC27 Under the full cost method of accounting, all
costs associated with property acquisition, exploration, and development
activities are capitalized to cost centers, which are established on a
country-by-country basis. The definition of discontinued operation, however,
applies to disposals of components of an entity, which is defined as the
lowest level for which identifiable cash flows are largely independent of
the cash flows of other assets and liabilities.
BC28 The Board concluded that the definition of
discontinued operation will not be operable under the full cost method of
accounting because of differences in the tracking and allocation of costs,
which is at a much higher level than the method in Topic 360 and in the
definition of discontinued operation.
Changing Lanes
In August 2023, the FASB issued ASU 2023-05, which requires entities
that qualify as either a joint venture
or a corporate joint venture, as defined in the ASC
master glossary, to apply a new basis of accounting upon the formation of
the joint venture. The ASU’s amendments “are effective prospectively for all
joint venture formations with a formation date on or after January 1, 2025.”
Early adoption is permitted.
The ASU amends ASC 205-10-05-3(b), and makes related amendments to ASC
205-20, to indicate that a “business or nonprofit activity that, on
acquisition or upon formation of a joint venture, is classified as held for
sale” by the newly formed joint venture would be reported as a discontinued
operation.
Chapter 2 — Long-Lived Assets Classified as Held and Used
Chapter 2 — Long-Lived Assets Classified as Held and Used
2.1 Overview
ASC 360-10
35-15
There are unique requirements of accounting for the
impairment or disposal of long-lived assets to be held and
used or to be disposed of. Although this guidance deals with
matters which may lead to the ultimate disposition of
assets, it is included in this Subsection because it
describes the measurement and classification of assets to be
held and used and assets held for disposal before actual
disposition and derecognition. See the Impairment or
Disposal of Long-Lived Assets Subsection of Section
360-10-40 for a discussion of assets or asset groups for
which disposition has taken place in an exchange or
distribution to owners.
Long-lived assets within the scope of ASC 360-10 are accounted for
and tested for impairment differently depending on the entity’s intent with regard
to the assets. Long-lived assets classified as held and used are those that the
entity intends to recover through use. Long-lived assets the entity intends to
recover through sale are classified as held and used until the held-for-sale
classification criteria are met (Chapter 3). Long-lived assets the entity intends to dispose of other
than by sale are classified as held and used until they are disposed of (Chapter 4).
ASC 360-10 contains a specific framework for accounting for long-lived assets
classified as held and used. Under ASC 360-10-35-21, long-lived assets that are
classified as held and used “shall be tested for recoverability whenever events or
changes in circumstances indicate that [their] carrying amount may not be
recoverable.” In addition, ASC 360-10-35-23 states that such assets “shall be
grouped with other assets and liabilities at the lowest level for which identifiable
cash flows are largely independent of the cash flows of other assets and
liabilities.”
In accordance with ASC 360-10-35-17, a long-lived asset (asset group) is not
recoverable if its carrying amount “exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset (asset
group).” When a long-lived asset (asset group) is not recoverable, it is necessary
to determine its fair value since “[a]n impairment loss shall be measured as the
amount by which the carrying amount of a long-lived asset (asset group) exceeds its
fair value.”
2.2 When to Test a Long-Lived Asset (Asset Group) for Recoverability
ASC 360-10
When to Test a Long-Lived Asset for Recoverability
35-21
A long-lived asset (asset group) shall be tested for
recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable.
The following are examples of such events or changes in
circumstances:
-
A significant decrease in the market price of a long-lived asset (asset group)
-
A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition
-
A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator
-
An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group)
-
A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group)
-
A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.
ASC 360-10-35-21 requires that an entity test a long-lived asset
(asset group) classified as held and used for impairment whenever “events or changes
in circumstances indicate that its carrying amount might not be recoverable.” Such
an event or change in circumstance is often referred to as a “triggering event.” The
basis for this testing framework is described in paragraph B16 of the Background
Information and Basis for Conclusions of FASB Statement 144, which states, in
part:
The Board concluded . . . that management has the
responsibility to consider whether an asset is impaired but that to test each
asset each period would be too costly. Existing information and analyses
developed for management review of the entity and its operations generally will
be the principal evidence needed to determine when an impairment exists.
Indicators of impairment, therefore, are useful examples of events or changes in
circumstances that suggest that the recoverability of the carrying amount of an
asset should be assessed.
Therefore, an entity is not required to perform recoverability tests
annually or regularly as it is for certain other assets like goodwill or
indefinite-lived intangible assets. However, an entity must continually assess
whether events or changes in circumstances indicate that long-lived assets may not
be recoverable.
ASC 360-10-35-21 gives examples of events or changes in circumstances that may
indicate that the carrying amount of a long-lived asset (group) may not be
recoverable. These examples are not all-inclusive; entities will need to assess
their specific facts and circumstances in determining whether there is a triggering
event. Additional events or changes in circumstances that an entity should consider
include:
- Evidence of a physical defect in an asset (asset group).
- Substantial doubt about an entityʼs ability to continue as a going concern.
- A significant change in technology that renders an asset (asset group) obsolete or noncompetitive.
- An impairment of goodwill.
- A significant stock price decline.
- Order cancellations or postponements from major customers, or both.
- Reduction in vacancy rate or rental income.
- A general economic downturn that is expected to have an impact on the entity.
The examples listed in ASC 360-10-35-21 include “a significant
decrease in the market price of a long-lived asset (asset group).” Therefore, the
existence of an appraisal or other independent valuation information that suggests
that the fair value of a held-and-used asset (asset group) is below its carrying
amount may be an indicator of impairment. However, the existence of such information
does not, in and of itself, mean that an impairment loss must be recognized since a
recoverability test must be performed on an undiscounted basis for the long-lived
asset (asset group) before recognition of any impairment loss (see Section 2.4).
An entity may be considering selling a part of its business but may
not yet meet the criteria to classify the related assets and liabilities as held for
sale (see Section 3.3
for more information). ASC 360-10-35-21(f) indicates that management should test the
long-lived assets (asset group) for recoverability if there is a “current
expectation that, more likely than not, a long-lived asset (asset group) will be
sold or otherwise disposed of significantly before the end of its previously
estimated useful life.” The threshold for “more likely than not” is considered to be
greater than 50 percent but less than probable. Therefore, an entity may be required
to test the long-lived assets it expects to sell for recoverability (i.e., on a
held-and-used basis) before the assets meet the criteria to be classified as held
for sale. The entity should also review depreciation estimates for an asset (asset
group) when impairment indicators exist (see Section 2.7).
In some cases, an entity may identify an impairment indicator for a specific asset
that is part of a larger asset group. If so, the entity should consider the
significance of that individual asset in relation to the asset group as a whole. If
the entity determines that the individual asset is insignificant to the asset group,
it may decide that it does not need to perform a recoverability test for the asset
group but should consider whether to revise the depreciation or amortization
estimate for that asset. However, an entity should not recognize an asset that has
no future benefit in its financial statements (see Section 2.8).
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.
2.3 Grouping Long-Lived Assets Classified as Held and Used
ASC 360-10
Grouping Long-Lived Assets Classified as Held and
Used
35-23 For purposes of recognition
and measurement of an impairment loss, a long-lived asset or
assets shall be grouped with other assets and liabilities at
the lowest level for which identifiable cash flows are
largely independent of the cash flows of other assets and
liabilities. However, an impairment loss, if any, that
results from applying this Subtopic shall reduce only the
carrying amount of a long-lived asset or assets of the group
in accordance with paragraph 360-10-35-28.
Some long-lived assets may have largely independent cash flows and
therefore should be tested for impairment individually. However, many long-lived
assets are used in combination with other assets to generate combined cash flows in
such a way that the cash flows of each asset in the group are not largely
independent of the cash flows of other assets. In that case, entities must group
assets together to test them for impairment. Such a grouping is called an asset
group. The ASC master glossary defines an asset group as follows:
An asset group is the unit of accounting for a long-lived asset
or assets to be held and used, which represents the lowest level for which
identifiable cash flows are largely independent of the cash flows of other
groups of assets and liabilities.
Connecting the Dots
The term “asset group” is used throughout this publication
to refer to the long-lived asset or group of assets, including one or more
long-lived assets and possibly liabilities, that is classified as held and
used and is being tested for impairment.
An asset group may include not only long-lived assets that are
within the scope of ASC 360-10 but also other assets such as receivables, inventory,
indefinite-lived intangible assets, or goodwill. (See Section 2.3.7 for information about the order
in which impairment testing should be performed when an asset group includes
long-lived assets that are not within the scope of ASC 360-10.)
An entity performing an impairment analysis should begin at the
lowest level for which there are largely independent cash flows; this level would
depend on the entity’s specific facts and circumstances (e.g., an individual
production line, real estate asset, plant, or retail store). Cash flows may be
grouped at a higher level only if the entity determines that largely independent
cash flows do not exist at a lower level. In determining the lowest level of
identifiable cash flows for a long-lived asset or asset group, the entity may need
to use significant judgment and should consider all relevant facts and
circumstances. Such facts and circumstances may include the following:
- The interdependency of revenue-generating activities and the extent to which such assets must be operated together.
- The interdependence or interchangeability of assets and the extent to which such assets are operated together.
- The presence and extent of a shared-cost structure.
- The extent to which the entity manages its business at various levels, such as a local, district, or regional management level.
- The entity’s distribution characteristics, such as regional distribution centers, local distributors, or individual plants.
- The extent to which purchases are made by an individual location or on a combined basis.
The degree to which the revenues of a group of assets depend on the
revenue-generating activities of other assets may affect an entity’s determination
of an asset group. Interdependency of revenues can result from the way an entity is
structured or from contractual requirements outside the entity’s control. If the
entity cannot suspend the revenue-generating activities of one group of assets
because of contractual or other restrictions outside the entity’s control, a
higher-level asset grouping may be justified.
ASC 360-10-55-35 and 55-36 contain an example illustrating a
higher-level asset grouping that is based on the interdependence of revenues in such
a way that assets must be operated together.
ASC 360-10
Example 4: Grouping Assets for Impairment
Review
55-35
Varying facts and circumstances will inevitably justify
different groupings of assets for impairment review. While
grouping at the lowest level for which there are
identifiable cash flows for recognition and measurement of
an impairment loss is understood, determining that lowest
level requires considerable judgment.
55-36 This Example illustrates the
need for judgment in grouping assets for impairment, as
discussed in paragraphs 360-10-35-23 through 35-25. In this
Example, an entity operates a bus entity that provides
service under contract with a municipality that requires
minimum service on each of five separate routes. Assets
devoted to serving each route and the cash flows from each
route are discrete. One of the routes operates at a
significant deficit that results in the inability to recover
the carrying amounts of the dedicated assets. The five bus
routes would be an appropriate level at which to group
assets to test for and measure impairment because the entity
does not have the option to curtail any one bus route.
The degree to which an entity’s assets are interchangeable may also
affect its determination of asset groups. In some situations, largely identifiable
cash flows may not be associated with a specific asset group, in which case the
entity may be justified in grouping assets at a higher level. For example, if the
entity uses a fleet of interchangeable trucks, planes, or cargo ships to deliver
goods, the asset group might be at the fleet level if cash flows of an individual
asset cannot be identified.
A shared cost structure may affect an entity’s determination of its
asset groups. Shared costs are costs incurred by the entity that cannot be
identified or attributed to a specific asset group. If cash outflows from a group of
assets result from significant shared operating costs (e.g., shared sales force,
manufacturing, distribution, warehousing, research and development), it may be
necessary to group assets at a higher level. The entity should ensure that the
amount of shared costs is significant compared with its overall costs. For example,
a shared marketing function alone without other significant shared costs would not
be expected to justify a higher-level asset grouping. We do not believe that the
existence of shared back-office costs alone (e.g., finance, payroll, IT systems)
would support a higher-level asset grouping. Further, we think that shared operating
costs should be distinguished from allocated direct costs, which are costs that can
be directly associated with a specific asset group but may be recognized at the
corporate level for administrative purposes. If allocated direct costs are related
to a specific asset group even though such costs may not be allocated for internal
reporting purposes, we believe that an entity should specifically allocate those
costs to the asset group when evaluating the cash flows of that asset group. In
addition, the entity should not consider those direct costs to be shared costs when
determining whether a significant portion of the cash flows is interrelated.
Assets and liabilities are grouped under U.S. GAAP for different purposes, and the
guidance on grouping assets varies. For example, ASC 350-20 requires entities to
group assets (and liabilities) into a reporting unit when testing goodwill for
impairment. The identification of an asset group for impairment under ASC 360-10
differs from the identification of a reporting unit under ASC 350-20. The
determinations of a reporting unit and asset group must be based on the respective
ASC requirements as well as on the entity’s specific facts and circumstances. An
asset group is often at a lower level than a reporting unit but in some cases may be
at the same level. However, we would not expect an asset group to be at a higher
level than a reporting unit.
An entity should ensure that it appropriately documents the
judgments it uses in determining asset groups. Asset-group determinations are
subject to change on the basis of changes in facts and circumstances (see Section 2.3.8).
Bridging the GAAP
Under IAS 36, assets are tested at the individual asset
level or, if it is not possible to estimate the recoverable amount of an
individual asset, at the cash-generating unit (CGU) level. A CGU is the
smallest group of assets generating cash inflows that are largely
independent of the cash inflows from other assets. Under U.S. GAAP, the
assessment of independent cash flows for an asset group is generally based
on the net cash flows (i.e., cash inflows and outflows). Under IAS 36,
however, the focus is exclusively on whether cash inflows are largely
independent. While the resulting outcomes are often the same under the two
sets of standards, the different requirements could lead to differences.
2.3.1 Entity-Wide Assets
ASC 360-10
35-24 In limited
circumstances, a long-lived asset (for example, a
corporate headquarters facility) may not have
identifiable cash flows that are largely independent of
the cash flows of other assets and liabilities and of
other asset groups. In those circumstances, the asset
group for that long-lived asset shall include all assets
and liabilities of the entity.
35-25 In limited
circumstances, an asset group will include all assets
and liabilities of the entity. For example, the cost of
operating assets such as corporate headquarters or
centralized research facilities may be funded by
revenue-producing activities at lower levels of the
entity. Accordingly, in limited circumstances, the
lowest level of identifiable cash flows that are largely
independent of other asset groups may be the entity
level. See Example 4 (paragraph 360-10-55-35).
Some long-lived assets may not have identifiable cash flows that
are largely independent of the cash flows of the entity’s other assets (and
liabilities). Under ASC 360-10-35-25, “the cost of operating assets such as
corporate headquarters or centralized research facilities may be funded by
revenue-producing activities at lower levels of the entity.” Accordingly, in
certain circumstances, such long-lived assets are evaluated for impairment on an
entity level because largely independent cash flows do not exist for the asset.
In that case, the recoverability test estimates whether the entity, as a whole,
will generate cash flows sufficient to recover the carrying amount of all of its
assets.
An entity-level asset is tested for recoverability after any required testing of lower-level asset groups is performed. Paragraph B46 of the Background Information and Basis for Conclusions of FASB Statement 144 describes
the residual approach as one method that an entity may use to test an
entity-wide asset for recoverability:
The cash flows used in
the recoverability test should be reduced by the carrying amounts of the
entity’s other assets that are covered by this Statement to arrive at the
cash flows expected to contribute to the recoverability of the asset being
tested. Not-for-profit organizations should include unrestricted
contributions to the organization as a whole that are a source of funds for
the operation of the asset.
Therefore, under the residual approach, the entity compares (1)
the carrying amount of the entity-wide asset with (2) the cash flows available
to support the entity-wide asset calculated as the total undiscounted cash flows
for the entire entity less the carrying amounts of the lower-level asset groups.
If (1) is greater than (2), the entity would need to perform the second step of
the recoverability test for the entity-wide asset.
Example 2-1
Entity A grouped its long-lived assets for impairment
testing into (1) asset groups AG-1 and AG-2, for which
identifiable cash flows are largely independent of the
cash flows of other assets and liabilities, and (2)
asset group AG-EW, which consists of an entity-wide
information technology system long-lived asset that does
not have identifiable cash flows. The carrying amount of
AG-EW is $450.
Entity A has identified
events and circumstances indicating that the carrying
amounts of AG-2 and AG-EW might not be recoverable.
Entity-wide assets are tested for recoverability after
any required testing of lower-level asset groups. Entity
A first considers recoverability of both AG-1 and AG-2
as follows:
On the basis of the recoverability test,
A determines that AG-2 is not recoverable and recognizes
an impairment loss of $400.
Then, A
applies the residual approach to test AG-EW for
recoverability. For simplicity, in this example, it is
assumed that no cash outflows are associated with AG-EW.
The calculation under the residual approach is as
follows:
On the basis of the recoverability test
for AG-EW, A determines that AG-EW is recoverable; no
impairment is recorded for AG-EW.
2.3.2 Goodwill in Asset Groups
ASC 360-10
Effect of Goodwill When Grouping
35-26 Goodwill shall be
included in an asset group to be tested for impairment
under this Subtopic only if the asset group is or
includes a reporting unit. Goodwill shall not be
included in a lower-level asset group that includes only
part of a reporting unit. Estimates of future cash flows
used to test that lower-level asset group for
recoverability shall not be adjusted for the effect of
excluding goodwill from the group. The term reporting
unit is defined in Topic 350 as the same level as or one
level below an operating segment. That Topic requires
that goodwill be tested for impairment at the reporting
unit level.
35-27 Other than goodwill, the
carrying amounts of any assets (such as accounts
receivable and inventory) and liabilities (such as
accounts payable, long-term debt, and asset retirement
obligations) not covered by this Subtopic that are
included in an asset group shall be adjusted in
accordance with other applicable generally accepted
accounting principles (GAAP) before testing the asset
group for recoverability. Paragraph 350-20-35-31
requires that goodwill be tested for impairment only
after the carrying amounts of the other assets of the
reporting unit, including the long-lived assets covered
by this Subtopic, have been tested for impairment under
other applicable accounting guidance.
ASC 350-20
35-31 If goodwill and another
asset (or asset group) of a reporting unit are tested
for impairment at the same time, the other asset (or
asset group) shall be tested for impairment before
goodwill. For example, if a significant asset group is
to be tested for impairment under the Impairment or
Disposal of Long-Lived Assets Subsections of Subtopic
360-10 (thus potentially requiring a goodwill impairment
test), the impairment test for the significant asset
group would be performed before the goodwill impairment
test. If the asset group was impaired, the impairment
loss would be recognized prior to goodwill being tested
for impairment.
ASC 360-10-35-26 notes that goodwill is only included in an
asset group “if the asset group is or includes a reporting unit.” If the asset
group only includes part of a reporting unit, an entity would not include
goodwill in the carrying amount of the asset group when testing it for
impairment.
The guidance on including goodwill in an asset group that is
classified as held and used when it is tested for recoverability differs from
the guidance in ASC 350-20-40-1 through 40-6 on assigning goodwill to a disposal
group that is classified as held for sale. Under ASC 350, goodwill must be
assigned to a disposal group that meets the definition of a business in
accordance with ASC 805-10. However, for asset groups that are classified as
held and used, goodwill may not be included in an asset group if the assets are
grouped below the reporting unit level, even if the asset group itself meets the
definition of a business. (See Section 2.3.7 for more information about the order for
impairment testing when assets are classified as held and used.)
2.3.3 Debt and Other Liabilities in Asset Groups
Debt related to the financing of long-lived assets should
generally be excluded from the asset group when it is tested for recoverability.
The entity’s financing decisions should not affect the outcome of the
recoverability test or the measurement of the fair value of an asset group.
Therefore, the lowest level of identifiable cash flows will generally exclude
principal and interest payments associated with debt because debt payments are
often made at the corporate level or at a level above the asset group. Further,
the cash flows associated with debt and interest payments are usually easy to
identify and typically can be eliminated from the cash flows used to test the
asset group for recoverability.
If debt is related to a specific asset or assets in the asset
group, it may be appropriate to include debt in the asset group. If debt is
included in the asset group, only the cash outflows related to principal
payments should be included in the cash outflows used to test the asset group
for recoverability. ASC 360-10-35-29 excludes interest charges that will be
recognized as an expense when incurred from the recoverability test to ensure
that two entities with essentially the same asset groups and cash flows do not
have different results for their recoverability testing solely because of
differences in their respective capital structures.
However, the inclusion or exclusion of debt and the related cash
flows generally would not result in a different conclusion in the recoverability
test. That is, debt with a carrying value of $500 will reduce the carrying
amount of the asset group by $500 but would also have related, undiscounted cash
outflows of $500.
We believe that the same concept should also be applied to
liabilities other than debt. That is, operating liabilities are sometimes
included in the asset group because they are viewed as being related to the
assets in the group; however, nonoperating or financing liabilities are
generally excluded from the carrying amount of the asset group. Regardless of
whether a liability is included in or excluded from the asset group, the
associated cash flows should be determined consistently. For example, pension
obligations are often excluded from the carrying amount of the asset group. If
so, in estimating the cash flows of the asset group, an entity should only
include as an operating cash outflow the service cost component of the net
periodic pension costs, since the other components would be considered similar
to financing costs.
2.3.4 Right-of-Use Assets and Lease Liabilities in Asset Groups
ASC 360-10
15-4 The guidance in the
Impairment or Disposal of Long-Lived Assets Subsections
applies to the following transactions and activities:
- Except as indicated in (b) and the following
paragraph, all of the transactions and activities
related to recognized long-lived assets of an
entity to be held and used or to be disposed of,
including
- Right-of-use assets of lessees
- Long-lived assets of lessors subject to operating leases . . . .
ASC 842-20
35-9 A lessee shall determine
whether a right-of-use asset is impaired and shall
recognize any impairment loss in accordance with Section
360-10-35 on impairment or disposal of long-lived
assets.
A lessee must test an ROU asset for impairment in a manner
consistent with its treatment of other long-lived assets. In addition to the
discussion below, see Section
8.4.4 of Deloitte’s Roadmap Leases for more information about
an entity’s testing of ROU assets for impairment.
2.3.4.1 Entity Is a Lessee in a Finance Lease
For the reasons described in Section 2.3.3, we believe that a
lessee would generally exclude a finance lease liability from the carrying
amount of the asset group since that liability is akin to debt. Because the
finance lease obligation is excluded from the asset group that includes the
finance lease ROU asset, the finance lease payments — both principal and
interest — should not reduce the undiscounted expected future cash flows
used to test the asset group for recoverability.
Therefore, when performing the recoverability test for an
asset group that includes a finance lease ROU asset, a lessee would exclude
both (1) the finance lease obligation from the carrying value of the asset
group and (2) the related lease payments from the undiscounted expected
future cash flows.
Further, if the asset group fails to pass the first step of the impairment
test, the lessee would also exclude the finance lease obligation from the
determination of the fair value of the asset group in the second step.
2.3.4.2 Entity Is a Lessee in an Operating Lease
Two views have emerged regarding how a lessee should determine the carrying
value of an asset group in performing the first step of the impairment test
for its operating leases:
- View 1 — Exclude the operating lease obligation from the carrying amount of the asset group. The basis for this view is that while the lease is classified as an operating lease, the arrangement is viewed as a financing transaction. Therefore, in a manner consistent with the treatment of the lease obligation for a finance lease, the operating lease obligation and related lease payments would be excluded from the first step of the impairment test. Accordingly, the operating lease payments (both principal and interest) would not reduce the undiscounted expected future cash flows used to test the asset group for recoverability.
- View 2 — Include the operating lease obligation in the carrying amount of the asset group. Because the lease is classified as an operating lease, the related liability is not considered to be a financial liability. Therefore, the operating lease obligation would be included in the determination of the carrying amount of the asset group and the undiscounted expected future cash flows. Accordingly, the operating lease payments should be included as cash outflows in the determination of the undiscounted cash flows for the recoverability test.
In addition, since the total lease expense in an operating
lease is presented as a single line item in the income statement, the lease
payments include both an interest component and a principal component. As a
result, questions have arisen regarding whether the cash outflows related to
the operating lease obligation should include only the portion related to
principal or that related to both principal and interest (i.e., the full
payment). The FASB discussed this topic at its November 30, 2016, meeting.
The Board generally agreed that lessees should exclude interest payments
from calculations of the undiscounted cash flows in the first step of the
impairment test. However, some Board members noted that a lessee’s decision
to include interest in its impairment analysis could be viewed as an
accounting policy election.
Therefore, under View 2, a lessee can use one of the following two approaches:
- View 2A — Include only the principal component of lease payments as cash outflows in the undiscounted cash flows of the asset group. This view takes into account how the undiscounted cash flows of a typical financial liability would be determined, which would only include the principal component of the payments. Therefore, in a manner consistent with the guidance in ASC 360-10-35-29, a lessee would exclude the interest component of the lease payments from the asset group’s undiscounted cash flows. This is consistent with the Board’s view described above.
- View 2B — Include the total operating lease payments as cash outflows in the undiscounted cash flows of the asset group. According to this view, the lease liability is not considered to be akin to a financial liability; therefore, in a manner similar to the income statement presentation of operating lease expense as a single lease cost, total operating lease payments are included in the undiscounted cash flows of the asset group.
If a lessee is required to perform the second step of the
impairment test because the asset group that includes an operating lease ROU
asset fails to pass the first step, the lessee should apply the same
approach (i.e., maintain consistency regarding the inclusion or exclusion of
the lease liability) when calculating the fair value of the asset group in
the second step as the approach it used to determine the carrying amount of
the asset group in the first step. Therefore, if a lessee in an operating
lease excluded the lease liability when performing the first step of the
impairment test (i.e., View 1), the lessee should also exclude the lease
liability when determining the fair value of the asset group in the second
step of the impairment test. Alternatively, if the lessee included both the
ROU asset and lease liability when performing the first step of the
impairment test (i.e., View 2), the lessee should also include both the ROU
asset and lease liability when determining the fair value of the asset group
in the second step of the impairment test. Importantly, regardless of
whether an entity applied View 2A or 2B above when performing the first
step, the total lease payments should be used for the second step of the
impairment test because the cash flows used to determine the asset group’s
fair value will be discounted.
If the ROU asset related to an operating lease is impaired,
the lessee would amortize the remaining ROU asset in accordance with the
subsequent-measurement guidance that applies to finance leases — typically,
on a straight-line basis over the remaining lease term. Thus, the operating
lease would no longer qualify for the straight-line treatment of total lease
expense. However, in periods after the impairment, a lessee would continue
to present the ROU asset reduction and interest accretion related to the
lease liability as a single line item in the income statement. See Section 8.4.4 of Deloitte’s Roadmap
Leases for more information
about the subsequent measurement of a lease after an ROU impairment.
2.3.5 Deferred Taxes in Asset Groups
While ASC 360-10 does not specify whether an entity should use
pretax or post-tax cash flows in its recoverability test, many entities perform
the recoverability test on a pretax basis. When the entity performs the test by
using pretax cash flows, deferred taxes should not be included in the carrying
amount of the asset group. Alternatively, if the entity performs the test by
using post-tax cash flows, the deferred taxes related to the asset group should
be included in the carrying amount of the asset group. The inclusion or
exclusion of deferred taxes and the related cash flows generally would not
result in a different conclusion in the recoverability test. That is, a deferred
tax liability with a carrying value of $200 will reduce the carrying amount of
the asset group by $200 but would be expected to have related, undiscounted cash
outflows of $200.
In certain instances, tax amounts are directly related to the
assets in the asset group. For example, an entity may invest in projects that
receive tax incentives in the form of tax credits (e.g., affordable housing
projects, projects that produce energy or fuel from alternative, nonconventional
sources). The tax aspects of the asset change the economics of the decision to
invest in and operate the asset. In these instances, if the entity expects to
use the tax credits in its return, it may include the incremental cash flows
from the tax credits in the cash flow projection when assessing an asset’s
recoverability and measuring any impairment. Note that if the entity includes
the tax aspects of a transaction in determining the cash flows, it must ensure
that it is not recognizing the tax amounts twice in its cash flow
determinations.
2.3.6 Foreign Asset Groups and Accumulated Other Comprehensive Income, Including Foreign Currency Translation, in Asset Groups
ASC 830-30
45-13 An entity that has
committed to a plan that will cause the cumulative
translation adjustment for an equity method investment
or a consolidated investment in a foreign entity to be
reclassified to earnings shall include the cumulative
translation adjustment as part of the carrying amount of
the investment when evaluating that investment for
impairment. The scope of this guidance includes an
investment in a foreign entity that is either
consolidated by the reporting entity or accounted for by
the reporting entity using the equity method. This
guidance does not address either of the following:
- Whether the cumulative translation adjustment shall be included in the carrying amount of the investment when assessing impairment for an investment in a foreign entity when the reporting entity does not plan to dispose of the investment (that is, the investment or related consolidated assets are held for use)
- Planned transactions involving foreign investments that, when consummated, will not cause a reclassification of some amount of the cumulative translation adjustment.
45-14 In both cases,
paragraph 830-30-40-1 is clear that no basis exists to
include the cumulative translation adjustment in an
impairment assessment if that assessment does not
contemplate a planned sale or liquidation that will
cause reclassification of some amount of the cumulative
translation adjustment. (If the reclassification will be
a partial amount of the cumulative translation
adjustment, this guidance contemplates only the
cumulative translation adjustment amount subject to
reclassification pursuant to paragraphs 830-30-40-2
through 40-4.)
45-15 An entity shall
include the portion of the cumulative translation
adjustment that represents a gain or loss from an
effective hedge of the net investment in a foreign
operation as part of the carrying amount of the
investment when evaluating that investment for
impairment.
An entity performs the recoverability test in its functional
currency even if the asset group’s books of record are not maintained in the
entity’s functional currency (e.g., a foreign subsidiary whose local currency is
not the entity’s functional currency). Such circumstances could result in a
functional-currency impairment or the reversal of a local-currency
impairment.
ASC 830-30-45-13 states that “[a]n entity that has committed to
a plan that will cause the cumulative translation adjustment [CTA] for an equity
method investment or a consolidated investment in a foreign entity to be
reclassified to earnings shall include the [CTA] as part of the carrying amount
of the investment when evaluating that investment for impairment.” Therefore, an
entity should not include the CTA balance in the asset group when testing it for
recoverability on a held-and-used basis. (See Section 3.4.2 for more information about
including accumulated other comprehensive income [AOCI] in the disposal group
when the assets are held for sale.)
Although ASC 830-30-45-13 addresses foreign CTAs, there is no
specific U.S. GAAP guidance on how an entity should treat other items included
in AOCI (e.g., unrealized holding gains and losses on available-for-sale debt
securities, gains and losses related to postretirement benefits) when evaluating
an asset group for impairment. We believe that it is appropriate to analogize to
the guidance in ASC 830-30-45-13 for all items of AOCI.
For more information about testing a foreign entity for
impairment and the reclassification of the CTA out of equity, see Section 5.5 of
Deloitte’s Roadmap Foreign
Currency Matters.
2.3.7 Order of Impairment Testing When an Asset Group Is Held and Used
ASC 360-10
35-27 Other than goodwill,
the carrying amounts of any assets (such as accounts
receivable and inventory) and liabilities (such as
accounts payable, long-term debt, and asset retirement
obligations) not covered by this Subtopic that are
included in an asset group shall be adjusted in
accordance with other applicable generally accepted
accounting principles (GAAP) before testing the asset
group for recoverability. Paragraph 350-20-35-31
requires that goodwill be tested for impairment only
after the carrying amounts of the other assets of the
reporting unit, including the long-lived assets covered
by this Subtopic, have been tested for impairment under
other applicable accounting guidance.
As indicated in Section 2.3, an asset
group may include not only long-lived assets that are within the scope of ASC
360-10 but also other assets such as receivables, inventory, indefinite-lived
intangible assets, or goodwill. When assets other than long-lived assets are
present within an asset group, an entity needs to follow a required order when
testing the assets in the asset group for impairment. The following flowchart
illustrates the order in which an entity is required to test assets for
impairment when an asset group is classified as held and used:
This order ensures that the carrying amounts of any impaired
assets are adjusted before the carrying amount of the asset group is determined.
That is, it ensures that any impairments for assets that are tested for
impairment individually or at smaller units of account (e.g., receivables,
inventory, or indefinite-lived intangible assets) are recognized before assets
that are tested by using a larger unit of account. Therefore, an entity should
adjust the carrying amount of each asset, if necessary, before performing the
next impairment test. Further, ASU 2016-20 includes a technical
correction that amends ASC 340-40 to clarify that the order in which assets
should be tested for impairment is as follows: (1) assets outside the scope of
ASC 340-40 (e.g., inventory under ASC 330); (2) assets accounted for under ASC
340-40 (i.e., those associated with costs related to contracts with customers
within the scope of ASC 606); and (3) reporting units and asset groups under ASC
350 and ASC 360.
An entity would be expected to routinely assess for impairment,
under applicable GAAP, the assets that would be tested first (i.e., the assets
that are outside the scope of ASC 360-10 other than goodwill), regardless of
whether a triggering event occurs for the asset group. The fact that these
assets are part of an asset group does not change the process for testing them
for impairment.
As described further in Section 2.3.2, goodwill is only included
in an asset group “if the asset group is or includes a reporting unit” in
accordance with ASC 350-20-35-31. However, even if goodwill is not assigned to
an asset group, an entity should consider whether the existence of an impairment
indicator for one or more of its asset groups may suggest that goodwill is also
impaired.
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.
The entity should keep in mind that the required order for
testing long-lived assets and goodwill when an asset group is classified as held
and used differs from that when a disposal group is classified as held for sale
(see Section
3.5.1).
Connecting the Dots
The following is a list of assets that would be tested for impairment
before the asset group is tested:
- Accounts receivable (see ASC 310 and ASC 326).
- Inventory (see ASC 330-10-35).
- Assets accounted for under ASC 340-40 (i.e., those associated with costs related to contracts with customers within the scope of ASC 606).
- Intangible assets not being amortized that are to be held and used (i.e., indefinite-lived intangible assets) (see ASC 350-30-35).
- Servicing assets (see ASC 860-50-35).
- Loans (see ASC 310-10-35).
- Debt securities accounted for at fair market value, other than a temporary decline in the value of financial instruments accounted for at fair market value (see ASC 320-10-35).
- Equity securities, not recorded at fair value, without readily determinable fair values (see ASC 321-10-35).
- Equity method investments (see ASC 323-10-35).
- Mortgage banking assets (see ASC 948-310-35).
- Deferred policy acquisition costs (see ASC 944-60-25).
- Deferred tax assets (see ASC 740-10-30).
- Unproved oil and gas properties (see ASC 932-360-35).
- Entertainment — broadcasters’ assets (see ASC 920-350-35).
- Entertainment — cable television intangible assets not depreciated (see ASC 922-350-35).
- Entertainment — films (see ASC 926-20-35).
- Entertainment — music (see ASC 928-340-35).
- Costs of computer software to be sold, leased, or otherwise marketed (see ASC 985-20-35).
- Rate-regulated assets and regulated assets (see ASC 980).
- Sales-type, direct financing, and leveraged leases (see ASC 842 and ASC 326).
- Sale-leaseback transactions (see ASC 842 and ASC 326).
2.3.8 Changes in Asset-Group Determinations
Changes in asset-group determinations should be accounted for
prospectively in a manner similar to changes in estimates. Changes in
asset-group determinations might result when an entity undergoes a significant
change in its operating or reporting structure, has a significant acquisition or
disposition, or significantly changes the way in which it uses or deploys its
assets.
Connecting the Dots
Real estate demands and preferences have been affected by the
macroeconomic environment as well as changes in the way people live and
work. Accordingly, entities may consider repurposing or exiting certain
assets in their real estate portfolio. In the event that there are
changes in facts and circumstances that affect the intended use of an
asset or the interdependency of cash flows between the assets within an
asset group, an entity should consider reassessing its identified asset
groups. Changes in facts or circumstances that may result in the need to
reevaluate an asset group include:
- A change in the use of the underlying real estate asset(s) within the entity’s business.
- A decision to abandon, dispose of, or sublease real estate assets or a portion of such assets.
For example, if an entity exits a real estate asset and subleases all or
a portion of the property, the asset’s cash flows may no longer depend
on the cash flows associated with other assets in a preexisting asset
group and may be considered a separate asset group in the assessment of
impairment.
See Section 8.4.4.2.1 of Deloitte’s
Roadmap Leases for more
information.
2.4 Testing Long-Lived Assets for Recoverability
ASC 360-10
Long-Lived Assets Classified as Held and Used
35-16 This
guidance addresses how long-lived assets or asset groups
that are intended to be held and used in an entity’s
business shall be reviewed for impairment.
35-17 An
impairment loss shall be recognized only if the carrying
amount of a long-lived asset (asset group) is not
recoverable and exceeds its fair value. The carrying amount
of a long-lived asset (asset group) is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset
(asset group). That assessment shall be based on the
carrying amount of the asset (asset group) at the date it is
tested for recoverability, whether in use (see paragraph
360-10-35-33) or under development (see paragraph
360-10-35-34). An impairment loss shall be measured as the
amount by which the carrying amount of a long-lived asset
(asset group) exceeds its fair value.
05-6 This
Subsection provides guidance that focuses on developing
estimates of future cash flows used to test for
recoverability, including the:
- Cash flow estimation approach
- Cash flow estimation period
- Types of asset-related expenditures that should be considered in developing estimates of future cash flows.
Under ASC 360-10-35-17, an asset group is not recoverable if its
carrying amount “exceeds the sum of the undiscounted cash flows expected to result
from the use and eventual disposition of the asset (asset group).” The process of
determining whether an asset group is recoverable is generally referred to as the
“recoverability test.”
When an asset group is not recoverable, it is necessary to determine
its fair value since “an impairment loss shall be measured as the amount by which
the carrying amount of the long-lived asset (asset group) exceeds its fair value.”
If the asset group is determined to be recoverable, no impairment
loss is recognized even if the carrying value of the asset group exceeds its fair
value. However, even if the asset group is determined to be recoverable, an entity
should consider whether it should revise the depreciation or amortization estimates
for the long-lived assets in the group (see Section
2.7).
2.4.1 Estimates of Future Cash Flows Used to Test Long-Lived Assets for Recoverability
ASC 360-10
35-29
Estimates of future cash flows used to test the
recoverability of a long-lived asset (asset group) shall
include only the future cash flows (cash inflows less
associated cash outflows) that are directly associated
with and that are expected to arise as a direct result
of the use and eventual disposition of the asset (asset
group). Those estimates shall exclude interest charges
that will be recognized as an expense when incurred.
35-30
Estimates of future cash flows used to test the
recoverability of a long-lived asset (asset group) shall
incorporate the entity’s own assumptions about its use
of the asset (asset group) and shall consider all
available evidence. The assumptions used in developing
those estimates shall be reasonable in relation to the
assumptions used in developing other information used by
the entity for comparable periods, such as internal
budgets and projections, accruals related to incentive
compensation plans, or information communicated to
others. However, if alternative courses of action to
recover the carrying amount of a long-lived asset (asset
group) are under consideration or if a range is
estimated for the amount of possible future cash flows
associated with the likely course of action, the
likelihood of those possible outcomes shall be
considered. A probability-weighted approach may be
useful in considering the likelihood of those possible
outcomes. See Example 2 (paragraph 360-10-55-23) for an
illustration of this guidance.
ASC 360-10-35-29 states that “[e]stimates of future cash flows
used to test the recoverability of [an asset group should] include only the
future cash flows (cash inflows less associated cash outflows) that are directly
associated with and that are expected to arise as a direct result of the use and
eventual disposition of the [asset group].”
Certain costs that are directly attributable to a specific asset
group may be recognized at the corporate level for administrative purposes or
recognized by another part of the entity. Estimated future cash flows should
include all cash outflows necessary to support the cash inflows of the asset
group. Therefore, cash outflows should include an allocation of shared costs or
costs incurred by the entity on behalf of the asset group that are directly
attributable to the asset group even if such costs are not allocated to that
group for internal reporting purposes. For example, advertising expenses for a
fast-food chain may be identifiable with specific market areas or stores but may
be invoiced in the aggregate and recognized at the corporate level. Accordingly,
such advertising costs are directly attributable to the asset group and
therefore may be included in the asset group’s cash flow projections. However,
other expenses, such as corporate overhead, may not be directly attributable to
a particular asset group (e.g., the CEO’s salary or rent on the corporate
headquarters building).
Since the guidance in ASC 360-10 is relatively limited, an
entity may find it challenging and need to use judgment to identify which cash
flows to include in or exclude from the recoverability test.
2.4.1.1 Estimates of Future Cash Flows Are Undiscounted and Based on the Entity’s Expected Use of the Asset Group
The cash flows used in the recoverability test are
undiscounted and based on the entity’s own assumptions about its use and
eventual disposition of the asset group. Therefore, the cash flows
incorporate the entity’s intent regarding how it plans to recover the value
of the asset group rather than assessing how a market participant might use
and eventually dispose of the asset group. Accordingly, the cash flow amount
used in the recoverability test could differ from a fair value measurement
by more than just discounting. Entities are permitted to use either a
probability-weighted or a best estimate cash flow approach to test
long-lived assets for recoverability (see Section 2.4.3). However, if the entity
is considering alternative courses of action to recover an asset (e.g.,
either through sale or continued use), it may be useful for the entity, in
considering the likelihood of potential outcomes, to employ a
probability-weighted approach in which the possible scenarios are weighed on
the basis of the entity’s current expectations about the course of action it
will take to recover the assets.
Further, the cash flows used in the recoverability test should only include
cash flows associated with future expenditures (e.g., repairs and
maintenance and replacements) necessary to maintain the existing service
potential of the asset group (see Section
2.4.5 for more information).
The cash flows used in the recoverability test should be based only on facts
and circumstances available as of the testing date (see Section 2.4.2 for more details).
2.4.1.2 Estimates of Future Cash Flows Arising From the Eventual Disposition of the Asset Group
ASC 360-10-35-29 indicates that in the development of cash
flow estimates, the estimates of future cash flows should also include the
cash flows that are expected to arise from the eventual disposition of the
asset group. Therefore, the undiscounted cash flows should include any
estimated sales proceeds from the sale of the asset group at the end of the
cash flow estimation period.
The estimated sales proceeds represent the price the entity
would expect to receive for the asset group on the basis of its existing
service potential as of the assumed disposition date. The entity should use
assumptions that would maximize the proceeds that would be received in
selling the asset group. That is, in some cases, the asset group sold as a
whole would be assumed to receive a greater return than the sale of the
assets individually, or vice versa. In addition, an asset group that is a
business may be assumed to receive higher proceeds than an asset group that
is not a business. The cash flows from the sale of an asset group that is a
business generally represent the value of an operating business at the end
of the cash flow estimation period, while the cash flows from the sale of an
asset group that is not a business generally represent the salvage value of
the assets at the end of the cash flow estimation period. However, the
entity must continue to use entity-specific assumptions for the
recoverability test and should only assume proceeds on the basis of the
existing service potential and the entity’s use of the asset; such
assumptions could differ from market-participant assumptions in some cases.
Existing service potential does not mean that the entity should assume a
zero growth rate for the asset group; instead, any growth should be limited
to the asset groupʼs existing service potential. For example, the entity can
assume growth if its facilities have excess capacity and it can support its
projections for customer demand for its products. However, it would not be
appropriate to assume continued growth if the entityʼs facilities are
currently operating at maximum capacity and the building of an additional
facility would be required to achieve the projected growth.
2.4.1.3 Estimates of Future Cash Flows Should Be Reasonable
ASC 360-10 does not place any specific limits on the growth
assumptions used in the recoverability test. However, ASC 360-10-35-30
states that the assumptions used to develop cash flow estimates should be
“reasonable in relation to the assumptions used in developing other
information used by the entity for comparable periods, such as internal
budgets and projections, accruals related to incentive compensation plans,
or information communicated to others.” In addition, the entity should
ensure that the projections are consistent with budgets, forecasts, and
other information prepared by the entity such as those used to test goodwill
for impairment and to assess the recoverability of deferred tax assets.
However, such projections may differ when an entity has negative evidence in
the form of cumulative losses. (See Section 5.3.2.1 of Deloitte’s Roadmap
Income
Taxes for additional guidance on developing objective and
verifiable projections of taxable income when an entity is in a cumulative
loss.) Moreover, the entity should ensure that such projections are in line
with other data such as industry growth rates and trends. Thus, if an entity
has a reasonable basis for assuming that prices or volumes will increase
from current levels, it is appropriate for the entity to reflect such growth
assumptions in its cash flow estimates.
In SAB Topic 5.CC, the SEC staff expresses its views on an
entity’s judgments regarding the cash flows used in the recoverability
test.
SEC Staff Accounting Bulletins
SAB Topic 5.CC, Impairments [Reproduced in ASC
360-10-S99-2]
Question 3: Has the staff expressed any views
with respect to company-determined estimates of cash
flows used for assessing and measuring impairment of
assets under FASB ASC Topic 360?
Interpretive
Response: In providing guidance on the
development of cash flows for purposes of applying
the provisions of that Topic, FASB ASC paragraph
360-10-35-30 indicates that “estimates of future
cash flows used to test the recoverability of a
long-lived asset (asset group) shall incorporate the
entity’s own assumptions about its use of the asset
(asset group) and shall consider all available
evidence. The assumptions used in developing those
estimates shall be reasonable in relation to the
assumptions used in developing other information
used by the entity for comparable periods, such as
internal budgets and projections, accruals related
to incentive compensation plans, or information
communicated to others.”
The staff recognizes that various factors, including
management’s judgments and assumptions about the
business plans and strategies, affect the
development of future cash flow projections for
purposes of applying FASB ASC Topic 360. The staff,
however, cautions registrants that the judgments and
assumptions made for purposes of applying FASB ASC
Topic 360 must be consistent with other financial
statement calculations and disclosures and
disclosures in MD&A. The staff also expects that
forecasts made for purposes of applying FASB ASC
Topic 360 be consistent with other forward-looking
information prepared by the company, such as that
used for internal budgets, incentive compensation
plans, discussions with lenders or third parties,
and/or reporting to management or the board of
directors.
For example, the staff has reviewed a fact pattern
where a registrant developed cash flow projections
for purposes of applying the provisions of FASB ASC
Topic 360 using one set of assumptions and utilized
a second, more conservative set of assumptions for
purposes of determining whether deferred tax
valuation allowances were necessary when applying
the provisions of FASB ASC Topic 740, Income Taxes.
In this case, the staff objected to the use of
inconsistent assumptions.
In addition to disclosure of key
assumptions used in the development of cash flow
projections, the staff also has required discussion
in MD&A of the implications of assumptions. For
example, do the projections indicate that a company
is likely to violate debt covenants in the future?
What are the ramifications to the cash flow
projections used in the impairment analysis? If
growth rates used in the impairment analysis are
lower than those used by outside analysts, has the
company had discussions with the analysts regarding
their overly optimistic projections? Has the company
appropriately informed the market and its
shareholders of its reduced expectations for the
future that are sufficient to cause an impairment
charge? The staff believes that cash flow
projections used in the impairment analysis must be
both internally consistent with the company’s other
projections and externally consistent with financial
statement and other public disclosures.
Connecting the Dots
ASC 930-360-35-1 and 35-2 provide specific guidance on estimating
future cash flows (both undiscounted and discounted) to determine
whether a mining entity’s value beyond proven and probable reserves
is impaired:
35-1 An entity shall include the cash flows associated
with value beyond proven and probable reserves in estimates
of future cash flows (both undiscounted and discounted) used
for determining whether a mining asset is impaired under
paragraphs 360-10-15-3 through 15-5. Estimated cash flows
also shall include the estimated cash outflows required to
develop and extract the value beyond proven and probable
reserves.
35-2 An entity shall consider the effects of
anticipated fluctuations in the market price of minerals
when estimating future cash flows (both undiscounted and
discounted) used for determining whether a mining asset is
impaired under the Impairment or Disposal of Long-Lived
Assets Subsections of Subtopic 360-10. Estimates of those
effects shall be consistent with estimates of a market
participant. Generally, an entity shall consider all
available information including current prices, historical
averages, and forward pricing curves. Those marketplace
assumptions typically shall be consistent with an entity’s
operating plans and financial projections underlying other
aspects of the impairment analysis (for example, amount and
timing of production). It generally would be inappropriate
for an entity to use a single factor, such as the current
price or a historical average, as a surrogate for estimating
future prices without considering other information that a
market participant would consider.
An entity may determine that there is substantial doubt
about its ability to continue as a going concern and, therefore, that it
must test its long-lived assets for recoverability. Provided that its
financial statements continue to be presented on a going-concern basis
(i.e., not on a liquidation basis of accounting), the cash flow estimates
the entity uses for recoverability testing may extend beyond one year on the
basis of the remaining useful life of the primary asset (see Section 2.4.4).
However, an entity should ensure that its cash flow estimates are reasonable
given the circumstances. In addition, if there is substantial doubt about an
entity's ability to continue as a going concern, it is more likely that the
entity is considering alternative courses of action and, therefore, that use
of a probability-weighted approach to estimate cash flows may be warranted
(see Section
2.4.3).
An entity in bankruptcy may use projections from its
reorganization plan to determine future cash flows provided that (1) the
reorganization has been confirmed by the bankruptcy court or (2) management
(following the advice of counsel) believes that the reorganization will be
approved by the bankruptcy court. The cash flow estimates the entity uses
for recoverability testing may extend beyond the expected bankruptcy filing
and emergence date provided that the entity can support the estimates upon
emergence from bankruptcy. However, an entity should carefully consider the
factors that led it to file for bankruptcy and should ensure that any
forecasts beyond the emergence date are reasonable given the circumstances.
In addition, the entity may want to use a probability-weighted approach to
estimate cash flows (see Section 2.4.3), possibly factoring in a sale of assets if
the entity were not to obtain the needed financing or emerge from
bankruptcy.
2.4.1.4 Cash Flows for Interest Charges
ASC 360-10-35-29 clarifies that the estimates of future cash flows should
“exclude interest charges that will be recognized as an expense when
incurred” to ensure that two entities with essentially the same assets
(asset groups) and cash flows do not have different assessments of
recoverability as a result of differences in their capital structures.
Therefore, interest changes should not be included in the cash flows when
the assets are in use (see Section
2.4.5) but capitalized interest should be included when
assets are under development (see Section
2.4.6). (Also see Section
2.3.3 for a discussion of debt in asset groups.)
2.4.1.5 Cash Flows From Hedging Instruments
On the basis of the guidance in ASC 815-30-35-42, we believe that an entity
should exclude the expected cash flows of a derivative hedging instrument
from the estimates of future cash flows when testing an asset group for
recoverability. (However, entities with oil- and gas-producing activities
that apply the full cost method of accounting should consider the guidance
in ASC 932-360-S99-2.) ASC 815-30-35-42 states:
Existing requirements in generally accepted accounting principles
(GAAP) for assessing asset impairment or credit losses or
recognizing an increased obligation apply to an asset or liability
that gives rise to variable cash flows (such as a variable-rate
financial instrument) for which the variable cash flows (the
forecasted transactions) have been designated as being hedged and
accounted for pursuant to paragraphs 815-30-35-3 and 815-30-35-38
through 35-41. Those impairment or credit loss requirements shall be
applied each period after hedge accounting has been applied for the
period, pursuant to those paragraphs. The fair value or expected
cash flows of a hedging instrument shall not be considered in
applying those requirements. The gain or loss on the hedging
instrument in accumulated other comprehensive income shall, however,
be accounted for as discussed in paragraphs 815-30-35-38 through
35-41.
2.4.1.6 Cash Flows From Insurance Recoveries
ASC 360-10-35-29 states that “[e]stimates of future cash
flows used to test the recoverability of a long-lived asset (asset group)
shall include only the future cash flows (cash inflows less associated cash
outflows) that are directly associated with and that are expected to arise
as a direct result of the use and eventual disposition of the asset (asset
group).” Accordingly, we do not believe that an entity should include cash
inflows from an insurance recovery related to the damage or destruction of a
long-lived asset in its cash flow estimates for an asset group, since such
cash inflows do not arise as a direct result of the use and eventual
disposition of the asset. Rather, we believe that the entity should apply
the principles in ASC 360 to recognize any impairment loss for the
long-lived asset separately from any insurance recovery. Therefore,
expenditures needed to repair or replace the existing asset (if the same
service potential is assumed) should be included in the entity’s cash flow
estimates.
By contrast, some entities obtain business interruption
insurance, which is insurance coverage that reimburses an entity’s operating
cash flows if it cannot operate (or can operate only at a reduced capacity)
because of a covered loss. We believe that it is appropriate to include the
cash flows related to business interruption insurance in the cash flow
estimates used to test an asset group for recoverability.
The accounting framework underlying the insurance recovery model is based on
an analogy to the guidance in ASC 410 on recognition of potential loss
recoveries. Specifically, ASC 410-30-35-8, which provides
subsequent-measurement guidance related to environmental obligations,
states, in part:
Potential recoveries may be claimed from a number of
different parties or sources, including insurers, potentially
responsible parties other than participating potentially responsible
parties (see paragraph 410-30- 30-2), and governmental or
third-party funds. The amount of an environmental remediation
liability should be determined independently from any potential
claim for recovery, and an asset relating to the recovery shall be
recognized only when realization of the claim for recovery is deemed
probable. The term probable is used in this Subtopic with the
specific technical meaning in paragraph 450-20-25-1 [the future
event or events are likely to occur].
The recognition criteria for a loss recovery differ from
those for a gain contingency. Provided that its collection is probable, a
loss recovery is recognized in the period in which the loss is incurred (or
the period in which collection becomes probable). By contrast, a gain contingency is recognized when it is realized or when it is realizable, whichever is earlier. While not codified, paragraph 16 of EITF Issue 01-10
discusses the EITF’s understanding of the distinction between a loss
recovery and a gain contingency: a loss recovery represents the recovery of
a loss already recognized in the financial statements, whereas a gain
contingency represents the recovery of a loss not yet recognized in the
financial statements or recovery of an amount that is greater than the loss
recognized in the financial statements. Thus, a loss recovery may only be
recognized up to the amount of the loss incurred for an insurance recovery.
Similarly, for business interruption insurance, we do not believe that it
would be appropriate to recognize an amount in excess of the recovery of
costs. Any excess would be recognized as a gain contingency in income when
realized or realizable.
2.4.2 Cash Flow Estimates Based on Facts and Circumstances That Exist as of the Testing Date
Estimates of future cash flows used to test recoverability of an
asset group should take into account the facts and circumstances that exist as
of the testing date. For example, assume that an entity concludes that it has a
triggering event as of its fiscal year-end and performs a recoverability test as
of that date in the subsequent period. While performing the test and while
having no intention of disposing of the asset group, the entity receives and
accepts an unsolicited offer for the asset group. In performing the required
recoverability test on a held-and-used basis, since the entity had no intention
of disposing of the asset group as of the testing date, it should not assume
that the asset group would be sold (or use a probability-weighted approach and
include a sale as one of the scenarios) (see the next section).
2.4.3 Probability-Weighted and Best-Estimate Cash Flow Approaches
Entities are permitted to use either a best-estimate approach or
a probability-weighted approach to estimating future cash flows. ASC
360-10-35-30 states, in part:
However, if alternative
courses of action to recover the carrying amount of a long-lived asset
(asset group) are under consideration or if a range is estimated for the
amount of possible future cash flows associated with the likely course of
action, the likelihood of those possible outcomes shall be considered. A
probability-weighted approach may be useful in considering the likelihood of
those possible outcomes.
An entity often uses a best-estimate approach when (1)
operations are stable and (2) the entity is not considering alternative courses
of action to recover an asset. However, when operations are not stable and there
is a range of possible future cash flows or the entity is considering
alternatives, such as potentially selling or abandoning an asset group versus
continuing to use it, entities typically use a probability-weighted approach to
comply with ASC 360-10-35-30. Specifically, ASC 360-10-35-30 states that if
alternative courses of action are under consideration, “the likelihood of those
possible outcomes shall be considered.” An entity is not precluded from using
different approaches for different asset groups if management is considering
different alternatives for one asset group but not for others.
One of the impairment indicators in ASC 360-10-35-21 is “[a]
current expectation that, more likely than not, a long-lived asset (asset group)
will be sold or otherwise disposed of significantly before the end of its
previously estimated useful life. The term more likely than not refers to
a level of likelihood that is more than 50 percent.” Therefore, entities may
need to perform a recoverability test when they are considering selling an asset
group but have not yet met the held-for-sale classification criteria. ASC
360-10-55-23 through 55-29 contain an example illustrating the
probability-weighted approach for developing estimates of future cash flows when
an entity is considering selling an asset group.
ASC 360-10
Example 2:
Probability-Weighted Cash Flows
55-23 This
Example illustrates the use of a probability-weighted
approach for developing estimates of future cash flows
used to test a long-lived asset for recoverability when
alternative courses of action are under consideration
(see paragraph 360-10-35-30). This Example has the
following Cases:
- Probability-weighted cash flows (Case A)
- Expected cash flows technique (Case B).
55-24 Cases A
and B share all of the following assumptions.
55-25 As of
December 31, 20X2, a manufacturing facility with a
carrying amount of $48 million is tested for
recoverability. At that date, 2 courses of action to
recover the carrying amount of the facility are under
consideration — sell in 2 years or sell in 10 years (at
the end of its remaining useful life).
55-26 The
possible cash flows associated with each of those
courses of action are $41 million and $48.7 million,
respectively. They are developed based on
entity-specific assumptions about future sales (volume
and price) and costs in varying scenarios that consider
the likelihood that existing customer relationships will
continue, changes in economic (market) conditions, and
other relevant factors.
Case A: Probability-Weighted Cash
Flows
55-27 The
following table shows the possible cash flows associated
with each of the courses of action — sell in 2 years or
sell in 10 years.
55-28 As
further indicated in the following table, there is a 60
percent probability that the facility will be sold in 2
years and a 40 percent probability that the facility
will be sold in 10 years.
55-29 The
alternatives of whether to sell or use an asset are not
necessarily independent of each other. In many
situations, after estimating the possible future cash
flows relating to those potential courses of action, an
entity might select the course of action that results in
a significantly higher estimate of possible future cash
flows. In that situation, the entity generally would use
the estimates of possible future cash flows relating
only to that course of action in computing future cash
flows. As shown, the expected cash flows are $44.1
million (undiscounted). Therefore, the carrying amount
of the facility of $48 million would not be
recoverable.
Case B: Expected Cash Flows Technique
55-30 This
Case illustrates the application of an expected present
value technique to estimate the fair value of a
long-lived asset in an impairment situation.
55-31 The
following table shows by year the computation of the
expected cash flows used in the measurement. They
reflect the possible cash flows (probability-weighted)
used to test the manufacturing facility for
recoverability in Case A, adjusted for relevant
marketplace assumptions, which increases the possible
cash flows in total by approximately 15 percent.
55-32 The
following table shows the computation of the expected
present value; that is, the sum of the present values of
the expected cash flows by year, each discounted at a
risk-free interest rate determined from the yield curve
for U.S. Treasury instruments. In this Case, a market
risk premium is included in the expected cash flows;
that is, the cash flows are certainty equivalent cash
flows. As shown, the expected present value is $42.3
million, which is less than the carrying amount of $48
million. In accordance with paragraph 360-10-35-17 the
entity would recognize an impairment loss of $5.7
million.
2.4.4 Primary Asset and the Cash Flow Estimation Period
ASC 360-10
35-31
Estimates of future cash flows used to test the
recoverability of a long-lived asset (asset group) shall
be made for the remaining useful life of the asset
(asset group) to the entity. The remaining useful life
of an asset group shall be based on the remaining useful
life of the primary asset of the group. For purposes of
this Subtopic, the primary asset is the principal
long-lived tangible asset being depreciated or
intangible asset being amortized that is the most
significant component asset from which the asset group
derives its cash-flow-generating capacity. The primary
asset of an asset group therefore cannot be land or an
intangible asset not being amortized.
35-32 Factors
that an entity generally shall consider in determining
whether a long-lived asset is the primary asset of an
asset group include the following:
- Whether other assets of the group would have been acquired by the entity without the asset
- The level of investment that would be required to replace the asset
- The remaining useful life of the asset relative to other assets of the group. If the primary asset is not the asset of the group with the longest remaining useful life, estimates of future cash flows for the group shall assume the sale of the group at the end of the remaining useful life of the primary asset.
The period over which an entity should estimate cash flows when
performing the recoverability test for a single long-lived asset should
correspond to the asset’s remaining useful life to the entity. When long-lived
assets with different remaining useful lives are grouped together to form an
asset group, the cash flow estimation period for the group is based on the
remaining useful life of the primary asset of the group to the entity.
According to ASC 360-10-35-31, the primary asset is “the
principal long-lived tangible asset being depreciated or intangible asset being
amortized that is the most significant component asset from which the asset
group derives its cash-flow-generating capacity.” To prevent an entity from
estimating cash flows over an unlimited period, the primary asset must be an
asset with a finite useful life and therefore cannot be land, goodwill, an
indefinite-lived intangible asset, or an internally generated intangible asset
that has been expensed as incurred.
The primary asset is typically the asset in the asset group that
has the longest remaining useful life to the entity, would require the highest
level of investment to replace, and without which some or all of the other
assets of the group might not have continuing service potential. The primary
asset is not always the asset with the longest remaining useful life. ASC
360-10-35-32(c) states that if the primary asset is not the asset that has the
longest remaining useful life, estimates of future cash flows for the group
should be based on the assumption that the group will be sold “at the end of the
remaining useful life of the primary asset.” In some cases, identifying the
primary asset is relatively straightforward, but in other cases it may be
challenging, especially when multiple long-lived assets appear crucial to
generating the cash flows of the asset group. Entities will therefore need to
apply judgment in such situations.
If the entity determines that it must change the depreciation or
amortization period for the primary asset, it must use the revised useful life
in developing its cash flow estimates. For example, if, concurrently with the
triggering event, the entity determines that it must shorten the useful life of
the primary asset from five years to three years, the undiscounted cash flows
should be determined for the revised useful life of the primary asset, which
would be three years. See Section 2.7 for more information.
2.4.5 Expenditures for Assets That Are in Use
ASC 360-10
35-33
Estimates of future cash flows used to test the
recoverability of a long-lived asset (asset group) that
is in use, including a long-lived asset (asset group)
for which development is substantially complete, shall
be based on the existing service potential of the asset
(asset group) at the date it is tested. The service
potential of a long-lived asset (asset group)
encompasses its remaining useful life,
cash-flow-generating capacity, and for tangible assets,
physical output capacity. Those estimates shall include
cash flows associated with future expenditures necessary
to maintain the existing service potential of a
long-lived asset (asset group), including those that
replace the service potential of component parts of a
long-lived asset (for example, the roof of a building)
and component assets other than the primary asset of an
asset group. Those estimates shall exclude cash flows
associated with future capital expenditures that would
increase the service potential of a long-lived asset
(asset group).
ASC 360-10 requires that the cash flows used in the
recoverability test for an asset group that is in use (including an asset group
for which development is substantially complete) be based on the existing
service potential of an asset group as of the date on which it is tested.
According to paragraph B29 of the Background Information and Basis for Conclusions of FASB Statement 144, “estimates of future cash flows
used to test recoverability should include cash flows (including estimated
salvage values) associated with asset-related expenditures that replace (a)
component parts of a long-lived asset or (b) component assets (other than the
primary asset) of an asset group, whether those expenditures would be recognized
as an expense or capitalized in future periods.” However, paragraph B28 states
that such estimates should exclude “the cash flows associated with asset-related
expenditures that would enhance the existing service potential of a long-lived
asset (asset group) that is in use.” Cash flow estimates should be based on the
existing service potential of the asset group and therefore should include cash
flows associated with future expenditures (e.g., repairs and maintenance and
replacements) necessary to maintain the service potential of the asset group.
Accordingly, if the entity’s budgets and forecasts assume major capital
improvements or expansion rather than maintenance and capital replacements, an
entity should exclude the capital improvements or expansions from its cash flows
estimates in assessing impairment.
Connecting the Dots
ASC 360-10 provides no guidance on determining at what
point a long-lived asset (asset group) in development is “substantially
complete.” We believe that, in such circumstances, an entity should look
to the guidance in ASC 835-20-25-5, which states:
The capitalization period shall end when the asset is substantially
complete and ready for its intended use. Consider the capitalization
period that is appropriate in each of the following examples:
- Some assets are completed in parts, and each part is capable of being used independently while work is continuing on other parts. An example is a condominium. For such assets, interest capitalization shall stop on each part when it is substantially complete and ready for use.
- Some assets must be completed in their entirety before any part of the asset can be used. An example is a facility designed to manufacture products by sequential processes. For such assets, interest capitalization shall continue until the entire asset is substantially complete and ready for use.
- Some assets cannot be used effectively until a separate facility has been completed. Examples are the oil wells drilled in Alaska before completion of the pipeline. For such assets, interest capitalization shall continue until the separate facility is substantially complete and ready for use.
ASC 835-20-25-6 also states that an asset may be
considered substantially complete when the “completion of the asset is
intentionally delayed.”
2.4.6 Expenditures for Assets That Are Under Development
ASC 360-10
35-34
Estimates of future cash flows used to test the
recoverability of a long-lived asset (asset group) that
is under development shall be based on the expected
service potential of the asset (group) when development
is substantially complete. Those estimates shall include
cash flows associated with all future expenditures
necessary to develop a long-lived asset (asset group),
including interest payments that will be capitalized as
part of the cost of the asset (asset group). Subtopic
835-20 requires the capitalization period to end when
the asset is substantially complete and ready for its
intended use.
35-35 If a
long-lived asset that is under development is part of an
asset group that is in use, estimates of future cash
flows used to test the recoverability of that group
shall include the cash flows associated with future
expenditures necessary to maintain the existing service
potential of the group (see paragraph 360-10-35-33) as
well as the cash flows associated with all future
expenditures necessary to substantially complete the
asset that is under development (see the preceding
paragraph). See Example 3 (paragraph 360-10-55-33). See
also paragraphs 360-10-55-7 through 55-18 for
considerations of site restoration and environmental
exit costs.
Paragraph B31 of the Background Information and Basis for Conclusions of FASB Statement 144 states, in part:
The
Board observed that in contrast to a long-lived asset (asset group) that is
in use, a long-lived asset (asset group) that is under development will not
provide service potential until development is substantially complete. The
Board decided that such an asset (asset group) should be tested for
recoverability based on its expected service potential.
Therefore, ASC 360-10-35-35 requires that estimates of future
cash flows used in the recoverability test include the cash flows (cash outflows
and cash inflows) associated with all future asset-related expenditures
necessary to develop the asset group, regardless of whether those expenditures
would be recognized as an expense or capitalized in future periods.
While ASC 360-10-35-29 requires that cash flow estimates used in a recoverability test exclude interest payments that will be recognized as an expense when incurred, the cash flow estimates for asset groups under development should include interest payments that will be capitalized in accordance with ASC 835-20 as part of the cost of the assets in the group. Paragraph B32 of the Background Information and Basis for Conclusions of FASB Statement 144 states, in part:
The Board reasoned that for
a long-lived asset (asset group) that is under development, there is no
difference between interest payments and other asset-related expenditures
that would be capitalized in future periods. Therefore, the Board decided
that estimates of future cash flows used to test a long-lived asset (asset
group) for recoverability should exclude only those interest payments that
would be recognized as an expense when incurred.
Further, ASC 360-10-35-35 states that “[i]f a long-lived asset
that is under development is part of an asset group that is in use, estimates of
future cash flows used to test the recoverability of that group shall include”
future asset-related expenditures needed to (1) “substantially complete the
asset that is under development” and (2) maintain the existing service potential
of the other assets that are in use. ASC 360-10 includes an example illustrating
this concept.
ASC 360-10
Example 3: Estimates of Future Cash
Flows Used to Test an Asset Group for Recoverability
55-33 A long-lived asset that
is under development may be part of an asset group that
is in use. In that situation, estimates of future cash
flows used to test the recoverability of that group
shall include the cash flows associated with future
expenditures necessary to maintain the existing service
potential of the group as well as the cash flows
associated with future expenditures necessary to
substantially complete the asset that is under
development (see paragraph 360-10-35-35).
55-34 An entity engaged in
mining and selling phosphate estimates future cash flows
from its commercially minable phosphate deposits in
order to test the recoverability of the asset group that
includes the mine and related long-lived assets (plant
and equipment). Deposits from the mined rock must be
processed in order to extract the phosphate. As the
active mining area expands along the geological
structure of the mine, a new processing plant is
constructed near the production area. Depending on the
size of the mine, extracting the minable deposits may
require building numerous processing plants over the
life of the mine. In testing the recoverability of the
mine and related long-lived assets, the estimates of
future cash flows from its commercially minable
phosphate deposits would include cash flows associated
with future expenditures necessary to build all of the
required processing plants.
Example 2-2
Entity D designs, develops, and
manufactures components for high-speed optical networks.
The majority of D’s customers are building communication
infrastructures. In December 20X1, D purchased a plot of
land in an industrial complex, intending to build a
state-of-the-art production facility for D’s integrated
circuit and module products. Construction of the new
facility began in March 20X2 and is expected to be
completed by the end of August 20X2. In June 20X2, a
number of D’s customers announced plans to cut the level
of capital expenditures related to their infrastructure
buildout and D has received several order cancellations.
As of June 30, 20X2, because of the significant change
in business climate, D has determined that it is
required to assess the recoverability of the new
production facility in accordance with ASC
360-10-35-21(c).
ASC 360-10-35-34 requires that estimates
of future cash flows for the partially completed
production facility include all cash outflows associated
with the completion of the facility, including any
interest payments that would be capitalized as part of
the facility. Therefore, D should include the remaining
costs associated with completing the production facility
in its estimates of future cash flows when assessing the
asset group for recoverability. In addition, D will need
to include any payments to maintain the existing service
potential related to the facility once it is open for
production. Entity D’s estimates of future cash flows
used to test the recoverability of the facility should
be based on its expected useful life.
2.4.7 Certain Site Restoration and Environmental Exit Costs
ASC 360-10-55 provides detailed guidance on how an entity should
treat site restoration and environmental exit costs when testing an asset group
for recoverability. It lists indicators for when the cash flows for
environmental exit costs would or would not be included in the cash flows used
for recoverability testing.
ASC 360-10
Treatment of
Certain Site Restoration and Environmental Exit
Costs When Testing a Long-Lived Asset for
Impairment
55-1 The following guidance
demonstrates the consideration of restoration and
environmental exit costs when testing a long-lived asset
for impairment. Paragraphs 360-10-35-18 through 35-19
also provide guidance for such testing for assets
subject to asset retirement obligations.
55-2 For
certain assets covered by this Subtopic, costs for
future site restoration or closure (environmental exit
costs) may be incurred if the asset is sold, is
abandoned, or ceases operations. Environmental exit
costs within the scope of this Subsection include:
- Asset retirement costs recognized pursuant to Subtopic 410-20
- Asset retirement costs that have not been recognized because the obligation has not been incurred
- Certain environmental remediation costs that have not yet been recognized as a liability pursuant to Subtopic 410-30.
55-3 Pursuant
to Subtopic 410-20, asset retirement costs may be
incurred over more than one reporting period. For
example, the liability for performing certain capping,
closure, and postclosure activities in connection with
operating a landfill is incurred as the landfill
receives waste.
55-4 The
related cash flows, if any, might not occur until the
end of the asset’s life if the asset ceases operations,
or they might be deferred indefinitely as long as the
asset is not sold or abandoned.
55-5 The
issue is whether the cash flows associated with
environmental exit costs that may be incurred if a
long-lived asset is sold, is abandoned, or ceases
operations should be included in the undiscounted
expected future cash flows used to test a long-lived
asset for recoverability under this Subtopic.
55-6 For environmental exit
costs that have not been recognized as a liability for
accounting purposes, whether those environmental exit
costs shall be included in the undiscounted expected
future cash flows used to test a long-lived asset for
recoverability under this Subtopic depends on
management’s intent with respect to the asset. Pursuant
to this Subtopic, if management’s intent contemplates
alternative courses of action to recover the carrying
amount of the asset or if a range is estimated for the
amount of possible future cash flows, the likelihood of
those possible outcomes shall be considered. Examples of
management’s intent and the corresponding treatment of
the environmental exit costs in this Subtopic’s
recoverability test are described below. (Environmental
remediation costs discussed in certain of these cases
refer to environmental remediation costs that have not
yet been recognized as a liability pursuant to Subtopic
410-30.) This paragraph illustrates the guidance in
paragraphs 360-10-35-29 through 35-35 on estimating
future cash flows used to test a long-lived asset for
recoverability.
Environmental
Exit Costs That Shall Be Excluded From This
Subtopic’s Recoverability Test
55-7 The following guidance
demonstrates the consideration of restoration and
environmental exit costs when testing a long-lived asset
for impairment. In all of the following situations,
environmental exit costs would be excluded from this
Subtopic’s recoverability test.
Management Intends to Operate Asset, Future Cash Flows
Exceed Carrying Amount, and No Expectation of Cash
Outflow in Disposition
55-8 Management intends to
operate the asset for at least the asset’s remaining
depreciable life, the sum of the undiscounted future
cash flows expected from the asset’s use during that
period exceeds the asset’s carrying amount including any
associated goodwill, and management has no reason to
believe that the asset’s eventual disposition will
result in a net cash outflow.
Management Expects to Operate Asset, Asset Generating
Positive Cash Flows, Profitability Expected to Continue,
and No Constraints on Economic Life
55-9 Management expects to
operate the asset indefinitely and has the ability to do
so, the asset is generating positive cash flows,
management’s best information indicates that the asset
will continue to be profitable in the future, and there
are no known constraints to the asset’s economic life.
This Subtopic’s recoverability test shall include the
future cash outflows for repairs, maintenance, and
capital expenditures necessary to obtain the future cash
inflows expected to be generated by the asset based on
its existing service potential.
Asset Has Finite Life but Remediation
Costs Only Incurred if Asset Sold or Abandoned
55-10 The asset has a finite
economic life, but environmental remediation costs will
only be incurred if the asset is sold or abandoned. At
the end of the asset’s life, management intends either
to close the asset permanently because the costs of
remediating the asset exceed the proceeds that likely
would be received if the asset were sold or,
alternatively, to idle the asset by reducing production
to a minimal or nominal amount. (Although the
environmental remediation costs are excluded from this
Subtopic’s recoverability test, the recoverability test
shall incorporate the entity’s own assumptions about its
use of the asset. That is, the recoverability test shall
consider the likelihood of the alternative courses of
action [either closing or idling the asset] and the
resulting cash flows associated with those alternative
courses.)
Management Expects to Sell Asset and
Remediation Costs Not Required
55-11
Management expects to sell the asset in the future, and
the asset’s sale will not require the environmental
remediation costs to be incurred. (Although the
environmental remediation costs are excluded from this
Subtopic’s recoverability test, the fair value of the
asset is likely to be affected by the existence of those
costs. The diminished fair value shall be considered in
estimating the cash flows expected to arise from the
eventual sale of the asset.)
Environmental
Exit Costs That Shall Be Included in This
Subtopic’s Recoverability Test
55-12 The
following guidance demonstrates the consideration of
restoration and environmental exit costs when testing a
long-lived asset for impairment. In all of the following
situations, environmental exit costs would be included
in this Subtopic’s recoverability test.
Management Expects Remediation Costs to
Be Incurred but Uncertainties Exist in Application of
Laws
55-13 Management expects to
take a future action related to the asset that may cause
the environmental remediation costs to be incurred.
However, uncertainties or inconsistencies exist in how
the related laws or regulatory requirements are applied.
Management estimates, based on the weight of the
available evidence, a 60 percent chance that the
remediation costs will not be incurred and a 40 percent
chance that those costs will be incurred. Pursuant to
this Subtopic, other situations may exist in which cash
flows are estimated using a single set or best estimate
of cash flows.
Useful Life Limited and Then Asset
Disposition Required
55-14 The
useful life of the asset is limited as a result of any
of the following:
- Actual or expected technological advances
- Contractual provisions
- Regulatory restrictions.
Also, when the asset’s service potential
has ended, management will be required to dispose of the
asset under paragraph 360-10-55-16 or 360-10-55-17.
Continuing Losses May Require Asset Disposition
55-15 The asset has a current
period cash flow loss from operations combined with a
projection or forecast that anticipates continuing
losses. Management expects the asset to achieve
profitability in the future but uncertainty exists about
management’s ability to fund the future cash outflows up
to the time that net cash inflows are expected from the
asset’s use. In the event of a forced liquidation,
management would likely dispose of the asset under the
following paragraph or paragraph 360-10-55-17.
Intent to Abandon or Close an Asset
55-16 Management intends to
abandon or close the asset in the future, and the event
of abandonment or closure will cause the environmental
remediation costs to be incurred.
Future Sale Will Require Remediation
Costs to Be Incurred
55-17 Management intends to
sell the asset in the future, and the applicable laws,
regulations, or interpretations thereof require that
appropriate environmental remediation (not within the
scope of Subtopic 410-20) occur in connection with the
sale.
Management Expects to Operate Asset and
Retirement Costs to Be Incurred Over Its Life
55-18 Management expects to
operate the asset for the remainder of its useful life.
Related asset retirement costs are incurred over the
life of the asset (for example, the operation of a
landfill). Estimated cash flows associated with the
asset retirement costs yet to be incurred and recognized
shall be included in this Subtopic’s recoverability
test.
For more information about the accounting for environmental
obligations, see Deloitte’s Roadmap Environmental Obligations and Asset Retirement
Obligations.
2.4.8 Assets Subject to Asset Retirement Obligations
ASC 360-10
35-18 In
applying the provisions of this Subtopic, the carrying
amount of the asset being tested for impairment shall
include amounts of capitalized asset retirement costs.
Estimated future cash flows related to the liability for
an asset retirement obligation that has been recognized
in the financial statements shall be excluded from both
of the following:
- The undiscounted cash flows used to test the asset for recoverability
- The discounted cash flows used to measure the asset’s fair value.
35-19 If the fair value of the
asset is based on a quoted market price and that price
considers the costs that will be incurred in retiring
that asset, the quoted market price shall be increased
by the fair value of the asset retirement obligation for
purposes of measuring impairment.
The initial liability for an asset retirement obligation is
recognized, and a corresponding amount is added to the carrying amount of the
related long-lived asset. The liability is adjusted in each period to reflect
the passage of time (i.e., accretion expense) and any changes in the estimated
future cash flows underlying the initial fair value measurement.
ASC 360-10-35-18 requires that “the carrying amount of the asset
being tested for impairment . . . include amounts of capitalized asset
retirement costs.” However, the asset retirement obligation liability should be
excluded from the asset group. Accordingly, the estimates of future cash
outflows associated with the asset retirement obligation liability should also
be excluded from the impairment test. In addition, ASC 360-10 requires that an
adjustment (an increase) be made to the fair value of the asset group if that
fair value takes into account the costs that will be incurred in retiring that
asset.
For more information about the accounting for asset retirement
obligations, see Deloitte’s Roadmap Environmental Obligations and Asset Retirement
Obligations.
2.5 Measurement of an Impairment Loss
ASC 360-10
Measurement of an
Impairment Loss
35-17
An impairment loss shall be recognized only if the carrying
amount of a long-lived asset (asset group) is not
recoverable and exceeds its fair value. The carrying amount
of a long-lived asset (asset group) is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset
(asset group). That assessment shall be based on the
carrying amount of the asset (asset group) at the date it is
tested for recoverability, whether in use (see paragraph
360-10-35-33) or under development (see paragraph
360-10-35-34). An impairment loss shall be measured as the
amount by which the carrying amount of a long-lived asset
(asset group) exceeds its fair value.
ASC 360-10 defines impairment as “the condition that exists when the
carrying amount of a long-lived asset (asset group) exceeds its fair value.” When an
entity determines that the carrying amount of the asset group is not recoverable
because the undiscounted cash flows used in the recoverability test are less than
its carrying amount, an impairment loss is measured as the amount by which the
carrying amount exceeds fair value. An impairment loss is allocated to the
long-lived assets within the scope of ASC 360-10 “on a pro rata basis using the
relative carrying amounts of those assets, except that the loss allocated to an
individual long-lived asset of the group shall not reduce the carrying amount of
that asset below its fair value whenever that fair value is determinable without
undue cost and effort.”
Bridging the GAAP
Under IAS 36, if impairment indicators exist, an entity
applies a one-step approach in calculating a CGU impairment. That is, the
amount by which the carrying value of the asset or CGU exceeds the
recoverable amount is recorded as an impairment loss. The recoverable amount
for impairment (whether property, plant, and equipment [PP&E];
intangibles; or goodwill) is defined as the greater of:
- The asset’s or CGU’s fair value less costs to sell.
- The sum of future discounted cash flows, including the disposal value (also referred to as the value in use).
2.5.1 Determining the Fair Value of an Asset Group
ASC 360-10
35-36 For
long-lived assets (asset groups) that have uncertainties
both in timing and amount, an expected present value
technique will often be the appropriate technique with
which to estimate fair value.
The fair value of an asset group and the individual assets is
measured in accordance with ASC 820, which establishes a framework for measuring
fair value and requires disclosures about fair value measurements. Below is a
brief overview of the principles of ASC 820. For detailed information about
measuring fair value, see Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including
the Fair Value Option).
2.5.1.1 Exit Price
ASC 820-10-20 defines fair value as the “price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.” Thus, a
fair value measurement is an “exit price.” The exit price for an asset or
liability conceptually differs from its transaction price, which is an entry
price. While an exit price and an entry price could be the same in many
situations, a transaction price cannot be presumed to represent the fair
value of an asset or liability.
2.5.1.2 Unit of Valuation Versus Unit of Account
The unit of valuation is the grouping of assets, liabilities, or equity
instruments for fair value measurement purposes. ASC 820 provides guidance
on determining the unit of valuation. The unit of valuation (also referred
to as the “valuation premise”) for nonfinancial assets is the asset’s
highest and best use. The highest and best use of an asset might provide
maximum value through its use either (1) in combination with other assets or
other assets and liabilities or (2) on a stand-alone basis.
The unit of account represents the level of aggregation or
disaggregation of individual assets, liabilities, or equity instruments for
recognition in the financial statements and is generally determined on the
basis of the guidance in the Codification topics. Under ASC 360-10, the unit
of account for impairment testing is the asset group (or the disposal group
when assets are held for sale). However, the asset group is not the unit of
account for recognition purposes when the assets are held and used (but is
the unit of account when the disposal group is held for sale). Rather, each
of the individual long-lived assets represents a single unit of account.
Therefore, in accordance with ASC 360-10-35-28, an entity must allocate the
difference between the fair value of the asset group and the carrying amount
of the asset group (i.e., the amount of impairment) to individual long-lived
assets within the asset group. This allocation is required even if the unit
of valuation for fair value measurement purposes is the asset group.
While the unit of account may differ conceptually from the unit of valuation,
the unit of account for testing the impairment of the asset group generally
will be the same as the unit of valuation. If the entity determines that the
unit of valuation should differ from the asset group (i.e., the highest and
best use of an asset group would be to group it together with other assets
and, possibly, liabilities), it should reconsider whether it has properly
identified its asset groups.
2.5.1.3 Highest and Best Use
When determining the fair value of an asset group, an entity must consider
the highest and best use of the nonfinancial asset(s) from a
market-participant perspective. ASC 820-10-35-10C states that the “[h]ighest
and best use is determined from the perspective of market participants, even
if the reporting entity intends a different use,” but clarifies that “a
reporting entity’s current use of a nonfinancial asset is presumed to be its
highest and best use unless market or other factors suggest that a different
use by market participants would maximize the value of the asset.”
2.5.1.4 Market Participants
To meet the fair value measurement objective in ASC 820, an entity must
develop assumptions that market participants would use to determine the
price of an asset, liability, or equity instrument in an orderly transaction
as of the measurement date. ASC 820 defines the term “market participants”
as follows:
Buyers and sellers in the principal (or most advantageous)
market for the asset or liability that have all of the following
characteristics:
- They are independent of each other, that is, they are not related parties, although the price in a related-party transaction may be used as an input to a fair value measurement if the reporting entity has evidence that the transaction was entered into at market terms
- They are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary
- They are able to enter into a transaction for the asset or liability
- They are willing to enter into a transaction for the asset or liability, that is, they are motivated but not forced or otherwise compelled to do so.
2.5.1.5 Principal (or Most Advantageous) Market
Underlying the fair value measurement objective in ASC 820
is the concept of an entity transacting in the principal market for the
asset or liability (or equity instrument), or in the absence of a principal
market, the most advantageous market. The ASC master glossary defines the
principal market as the “market with the greatest volume and level of
activity for the asset or liability” and the most advantageous market as the
“market that maximizes the amount that would be received to sell the asset
or minimizes the amount that would be paid to transfer the liability, after
taking into account transaction costs and transportation costs.” The
determination of the principal (or most advantageous) market for an asset,
liability, or equity instrument can affect the fair value measurement since
the exit price may differ from market to market. The concept of the most
advantageous market is relevant only if there is no principal market for the
asset, liability, or equity instrument subject to the fair value
measurement.
2.5.1.6 Valuation Techniques
An entity measures fair value on the basis of one or more of
the three valuation approaches outlined in ASC 820-10-35-24A: (1) the market
approach, (2) the income approach, or (3) the cost approach. Further, ASC
820-10-35-24 notes that the entity selects one or more techniques “that are
appropriate in the circumstances and for which sufficient data are
available” to maximize the use of observable inputs while minimizing the use
of unobservable inputs. If multiple techniques are used, the entity should
evaluate the resultant range and should select a point within the range that
is most representative of fair value.
2.5.2 Assets Subject to Nonrecourse Debt
Long-lived assets may include property subject to nonrecourse
debt. The fair value of the property should be determined without regard to the
nonrecourse provisions. If the carrying amount of the property that reverts back
to the lender is less than the amount of nonrecourse debt extinguished, a gain
would be recognized on extinguishment. Paragraph B34 of the Background Information and Basis for Conclusions of FASB Statement 144 describes the
Board’s rationale for requiring such recognition:
The
recognition of an impairment loss and the recognition of a gain on the
extinguishment of debt are separate events, and each event should be
recognized in the period in which it occurs. The Board believes that the
recognition of an impairment loss should be based on the measurement of the
asset at its fair value and that the existence of nonrecourse debt should
not influence that measurement.
2.5.3 Allocating an Impairment Loss to the Assets in the Asset Group
ASC 360-10
35-28 An impairment loss for an
asset group shall reduce only the carrying amounts of a
long-lived asset or assets of the group. The loss shall
be allocated to the long-lived assets of the group on a
pro rata basis using the relative carrying amounts of
those assets, except that the loss allocated to an
individual long-lived asset of the group shall not
reduce the carrying amount of that asset below its fair
value whenever that fair value is determinable without
undue cost and effort. See Example 1 (paragraph
360-10-55-20) for an illustration of this guidance.
If the carrying amount of the asset group exceeds its fair
value, an impairment loss is recognized. If the impairment loss is related to an
individual long-lived asset, the asset should be reduced to its fair value. If
the impairment loss is determined for an asset group, the amount by which the
carrying amount exceeds fair value must be allocated to the long-lived assets
within the scope of ASC 360-10 “on a pro rata basis using the relative carrying
amounts of those assets, except that the loss allocated to an individual
long-lived asset of the group shall not reduce the carrying amount of that asset
below its fair value whenever that fair value is determinable without undue cost
and effort.” Therefore, the impairment loss should not be allocated to goodwill,
indefinite-lived intangibles, or other assets that are not within the scope of
ASC 360-10, even if those assets are included in the asset group being tested
for recoverability. In addition, entities should not reduce the carrying amount
of an individual asset below its fair value whenever the fair value is
determinable without undue cost and effort. We believe that since FASB Statement
144 was issued, entities have become more comfortable with fair value
measurements and that the fair value of most assets therefore should be
determinable without undue cost and effort.
If an entity determines that the fair value of one or more of
the long-lived assets in the asset group would exceed its adjusted amount if the
impairment were allocated to it, the entity should increase the adjusted
carrying value for that asset (or assets) to its fair value and allocate that
excess to the other long-lived assets in the group.
An outcome in which an entity cannot recognize the entire
impairment loss because it would result in recognition of one or more long-lived
assets below fair value is not expected. Accordingly, when such an outcome might
be initially indicated, we believe that the entity should revisit (1) the
determination of the fair value of the asset group, (2) the determination of the
fair value of the individual assets within the group when the impairment loss is
allocated, and (3) whether any other assets within the asset group that are not
within the scope of ASC 360-10 are impaired in accordance with ASC 360-10-35-27
(see Section
2.3.7).
An entity must use the pro rata allocation approach prescribed
by ASC 360 for allocating an impairment loss. That is, the entity cannot pick
the long-lived assets to which it will allocate an impairment loss while not
allocating the loss to other assets. In some cases, the allocation approach
could cause the adjusted carrying amount of an asset to exceed the individual
asset’s fair value. An entity is not permitted to write that asset down to its
individual fair value and increase the carrying amounts of other long-lived
assets in the group.
Example 1 from ASC 360-10-55-20 through 55-22 illustrates the
allocation of an impairment loss to the long-lived assets within an asset
group.
ASC 360-10
Example 1: Allocation of Impairment
Loss
55-20 This Example
illustrates the allocation of an impairment loss to the
long-lived assets of an asset group (see paragraph
360-10-35-28).
55-21 An entity owns a
manufacturing facility that together with other assets
is tested for recoverability as a group. In addition to
long-lived assets (Assets A–D), the asset group includes
inventory measured using first-in, first-out (FIFO),
which is reported at the lower of cost and net
realizable value in accordance with Topic 330, and other
current assets and liabilities that are not covered by
this Subtopic. The $2.75 million aggregate carrying
amount of the asset group is not recoverable and exceeds
its fair value by $600,000. In accordance with paragraph
360-10-35-28, the impairment loss of $600,000 would be
allocated as shown below to the long-lived assets of the
group.
55-22 If the fair value of an
individual long-lived asset of an asset group is
determinable without undue cost and effort and exceeds
the adjusted carrying amount of that asset after an
impairment loss is allocated initially, the excess
impairment loss initially allocated to that asset would
be reallocated to the other long-lived assets of the
group. For example, if the fair value of Asset C is
$822,000, the excess impairment loss of $100,000
initially allocated to that asset (based on its adjusted
carrying amount of $722,000) would be reallocated as
shown below to the other long-lived assets of the group
on a pro rata basis using the relative adjusted carrying
amounts of those assets.
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.
2.7 Depreciation and Amortization Estimates
ASC 360-10
35-22
When a long-lived asset (asset group) is tested for
recoverability, it also may be necessary to review
depreciation estimates and method as required by Topic 250
or the amortization period as required by Topic 350.
Paragraphs 250-10-45-17 through 45-20 and 250-10-50-4
address the accounting for changes in estimates, including
changes in the method of depreciation, amortization, and
depletion. Paragraphs 350-30-35-1 through 35-5 address the
determination of the useful life of an intangible asset. Any
revision to the remaining useful life of a long-lived asset
resulting from that review also shall be considered in
developing estimates of future cash flows used to test the
asset (asset group) for recoverability (see paragraphs
360-10-35-31 through 35-32). However, any change in the
accounting method for the asset resulting from that review
shall be made only after applying this Subtopic.
Entities should continually assess whether, as a result of changes in facts or
circumstances, they need to reassess the method with which, or period over which,
assets are being depreciated or amortized. The presence of an impairment indicator
may signal a reduction in the estimated useful life of an asset even if no
impairment is recognized.
If the entity changes its depreciation or amortization estimates, it should use the
revised estimates for the undiscounted cash flow projections in conjunction with
testing the asset for recoverability. For example, an entity may determine that
because of obsolescence, the useful life of the primary asset (see Section
2.4.4) is three years rather than five years. In such a scenario, the
entity would revise its depreciation estimates for the asset and consider whether
the asset must be tested for recoverability as a result of a triggering event. If
so, the cash flow projections used in the recoverability test should be for three
years. If the asset continues to have service potential, it should not be written
off.
In SAB Topic 5.CC, the SEC staff provided guidance on revising
depreciation estimates for an asset to be abandoned.
SEC Staff Accounting Bulletins
SAB Topic 5.CC, Impairments [Reproduced in ASC
360-10-S99-2]
Standards for recognizing and measuring
impairment of the carrying amount of long-lived assets
including certain identifiable intangibles to be held and
used in operations are found in FASB ASC Topic 360,
Property, Plant, and Equipment. Standards for recognizing
and measuring impairment of the carrying amount of goodwill
and identifiable intangible assets that are not currently
being amortized are found in FASB ASC Topic 350, Intangibles
— Goodwill and Other.
Facts: Company X has mainframe computers that are to
be abandoned in six to nine months as replacement computers
are put in place. The mainframe computers were placed in
service in January 20X0 and were being depreciated on a
straight-line basis over seven years. No salvage value had
been projected at the end of seven years and the original
cost of the computers was $8,400. The board of directors,
with the appropriate authority, approved the abandonment of
the computers in March 20X3 when the computers had a
remaining carrying value of $4,600. No proceeds are expected
upon abandonment. Abandonment cannot occur prior to the
receipt and installation of replacement computers, which is
expected prior to the end of 20X3. Management had begun
reevaluating its mainframe computer capabilities in January
20X2 and had included in its 20X3 capital expenditures
budget an estimated amount for new mainframe computers. The
20X3 capital expenditures budget had been prepared by
management in August 20X2, had been discussed with the
company’s board of directors in September 20X2 and was
formally approved by the board of directors in March 20X3.
Management had also begun soliciting bids for new mainframe
computers beginning in the fall of 20X2. The mainframe
computers, when grouped with assets at the lowest level of
identifiable cash flows, were not impaired on a “held and
used” basis throughout this time period. Management had not
adjusted the original estimated useful life of the computers
(seven years) since 20X0.
Question 1: Company X proposes to recognize an
impairment charge under FASB ASC Topic 360 for the carrying
value of the mainframe computers of $4,600 in March 20X3.
Does Company X meet the requirements in FASB ASC Topic 360
to classify the mainframe computer assets as “to be
abandoned?”
Interpretive Response: No. FASB ASC paragraph
360-10-35-47 provides that “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
FASB ASC Topic 250, Accounting Changes and Error
Corrections, to reflect the use of the asset over its
shortened useful life.”
Question 2: Would the staff accept an adjustment to
write down the carrying value of the computers to reflect a
“normalized depreciation” rate for the period from March
20X3 through actual abandonment (e.g., December 20X3)?
Normalized depreciation would represent the amount of
depreciation otherwise expected to be recognized during that
period without adjustment of the asset’s useful life, or
$1,000 ($100/month for ten months) in the example fact
pattern.
Interpretive Response: No. The mainframe computers
would be viewed as “held and used” at March 20X3 under the
fact pattern described. There is no basis under FASB ASC
Topic 360 to write down an asset to an amount that would
subsequently result in a “normalized depreciation” charge
through the disposal date, whether disposal is to be by
sale, abandonment, or other means. FASB ASC paragraph
360-10-35-43 requires the asset to be valued at the lower of
carrying amount or fair value less cost to sell in order to
be classified as “held for sale.” For assets that are
classified as “held and used” under FASB ASC Topic 360, an
assessment must first be made as to whether the asset (asset
group) is impaired. FASB ASC paragraph 360-10-35-17
indicates that an impairment loss shall be recognized only
if the carrying amount of a long-lived asset (asset group)
is not recoverable and exceeds its fair value. The carrying
amount of a long-lived asset (asset group) is not
recoverable if it exceeds the sum of the undiscounted cash
flows expected to result from the use and eventual
disposition of the asset (asset group). The staff would
object to a write down of long-lived assets to a “normalized
depreciation” value as representing an acceptable
alternative to the approaches required in FASB ASC Topic
360.
The staff also believes that registrants must continually
evaluate the appropriateness of useful lives assigned to
long-lived assets, including identifiable intangible assets
and goodwill. In the above fact pattern, management had
contemplated removal of the mainframe computers beginning in
January 20X2 and, more formally, in August 20X2 as part of
compiling the 20X3 capital expenditures budget. At those
times, at a minimum, management should have reevaluated the
original useful life assigned to the computers to determine
whether a seven year amortization period remained
appropriate given the company’s current facts and
circumstances, including ongoing technological changes in
the market place. This reevaluation process should have
continued at the time of the September 20X2 board of
directors’ meeting to discuss capital expenditure plans and,
further, as the company pursued mainframe computer bids.
Given the contemporaneous evidence that management’s best
estimate during much of 20X2 was that the current mainframe
computers would be removed from service in 20X3, the
depreciable life of the computers should have been adjusted
prior to 20X3 to reflect this new estimate. The staff does
not view the recognition of an impairment charge to be an
acceptable substitute for choosing the appropriate initial
amortization or depreciation period or subsequently
adjusting this period as company or industry conditions
change. The staff’s view applies also to selection of, and
changes to, estimated residual values. Consequently, the
staff may challenge impairment charges for which the timely
evaluation of useful life and residual value cannot be
demonstrated.
An entity must also disclose information about its depreciation policies in
accordance with ASC 360-10-50-1, which states:
Because of the significant effects
on financial position and results of operations of the depreciation method or
methods used, all of the following disclosures shall be made in the financial
statements or in notes thereto:
- Depreciation expense for the period
- Balances of major classes of depreciable assets, by nature or function, at the balance sheet date
- Accumulated depreciation, either by major classes of depreciable assets or in total, at the balance sheet date
- A general description of the method or methods used in computing depreciation with respect to major classes of depreciable assets.
2.8 Assets That Provide No Future Benefit
An entity may determine that a specific asset within a larger asset
group has no future benefit (e.g., when the asset is destroyed [as opposed to
damaged], becomes obsolete, or is lost). Even if the asset group is determined to be
recoverable as a whole, the entity would need to write off an asset that has no
future benefit.
Example 2-4
Entity A provides ground delivery services
to its customers through a fleet of trucks. Entity A has
appropriately determined that its ground delivery business
represents a “lowest level” for which identifiable cash
flows are largely independent of the cash flows of other
assets and liabilities. One truck in its delivery fleet has
been destroyed in an accident. Entity A can continue to
provide ground delivery services at the same level by using
the remaining trucks in its fleet in such a way that the
destroyed truck is not expected to be replaced. Although A
expects no adverse change in expected cash flows as a result
of the loss of the truck, A must write off the asset that
was destroyed.
An entity often maintains insurance to mitigate losses in the event
of property damage or casualty losses. Even if an asset is insured, the entity would
recognize a loss to write off the damaged asset and separately recognize any
recovery. The recognized loss to write off an asset and any associated recovery
proceeds (through insurance proceeds or other sources of recovery) is treated as two
separate events and therefore two separate units of account. The principle
underlying this separation is derived from the involuntary conversion guidance
codified in ASC 610-30-25-2.
2.9 Presentation of an Impairment Loss
ASC 360-10
Presentation of Impairment Loss for Long-Lived Assets
to Be Held and Used
45-4
An impairment loss recognized for a long-lived asset (asset
group) to be held and used shall be included in income from
continuing operations before income taxes in the income
statement of a business entity. If a subtotal such as income
from operations is presented, it shall include the amount of
that loss.
ASC 360-10-45-4 provides guidance on presentation of an impairment loss. An entity
must present an impairment loss recognized for a long-lived asset (asset group) in
income from continuing operations. If, instead of income before income taxes, the
entity presents a similar subtotal, such as income from operations or operating
income, it should include the impairment loss. The entity may present an impairment
loss as a separate line item in income from continuing operations to meet the
disclosure requirement in ASC 360-10-50-2.
Connecting the Dots
As described in ASC 360-10-35-4, depreciation is a “system of accounting
which aims to distribute the cost or other basic value of tangible capital
assets, less salvage (if any), over the estimated useful life of the [asset]
in a systematic and rational manner. It is a process of allocation, not of
valuation.” As a result, impairment losses should not be recognized in
depreciation or amortization expense.
ASC 360-10-40-3A through 3C describe the guidance an entity should apply to
derecognize an asset (asset group) that represents a (1) nonfinancial asset or (2)
business:
40-3A An entity shall account for the derecognition of a
nonfinancial asset, including an in substance nonfinancial asset and an asset
subject to a lease, within the scope of this Topic in accordance with Subtopic
610-20 on gains and losses from the derecognition of nonfinancial assets, unless
a scope exception from Subtopic 610-20 applies. For example, the derecognition
of a nonfinancial asset in a contract with a customer shall be accounted for in
accordance with Topic 606 on revenue from contracts with customers.
40-3B An entity shall account for the derecognition of a
subsidiary or group of assets that is either a business or nonprofit activity in
accordance with the derecognition guidance in Subtopic 810-10.
40-3C If an entity transfers a nonfinancial asset in
accordance with paragraph 360-10-40-3A, and the contract does not meet all of
the criteria in paragraph 606-10-25-1, the entity shall not derecognize the
nonfinancial asset and shall follow the guidance in paragraphs 606-10-25-6
through 25-8 to determine if and when the contract subsequently meets all the
criteria in paragraph 606-10-25-1. Until all the criteria in paragraph
606-10-25-1 are met, the entity shall continue to do all of the following:
- Report the nonfinancial asset in its financial statements
- Recognize depreciation expense as a period cost unless the assets have been classified as held for sale in accordance with paragraphs 360-10-45-9 through 45-10
- Apply the impairment guidance in Section 360-10-35.
For additional guidance on accounting for a sale of nonfinancial
assets, see Deloitte’s Roadmap Revenue Recognition.
2.10 Disclosures Related to Recognition of an Impairment Loss
In the period in which an entity recognizes an impairment loss, it
should disclose the information required by ASC 360-10-50-2.
ASC 360-10
Impairment of Long-Lived Assets Classified as Held and
Used
50-2 All
of the following information shall be disclosed in the notes
to financial statements that include the period in which an
impairment loss is recognized:
- A description of the impaired long-lived asset (asset group) and the facts and circumstances leading to the impairment
- If not separately presented on the face of the statement, the amount of the impairment loss and the caption in the income statement or the statement of activities that includes that loss
- The method or methods for determining fair value (whether based on a quoted market price, prices for similar assets, or another valuation technique)
- If applicable, the segment in which the impaired long-lived asset (asset group) is reported under Topic 280.
2.11 Early-Warning Disclosures When Future Impairments Are Reasonably Possible
ASC 360-10 does not specifically require entities to provide
“early-warning” disclosures when it is reasonably possible that an impairment may be
recognized in the near future (e.g., when expected future cash flows on an
undiscounted basis exceed the asset by only a small amount or when partial
impairments are recognized). As described in paragraph B57 of the Background
Information and Basis for Conclusions of FASB Statement 144, the Board decided that
entities did not need to provide any specific disclosures in such cases because the
disclosure requirements in ASC 275-10 related to risks and uncertainties associated
with the use of estimates in the preparation of the entity’s financial statements
would be relevant.
ASC 275-10
Certain Significant Estimates
50-6 This Subtopic requires
discussion of estimates when, based on known information
available before the financial statements are issued or are
available to be issued (as discussed in Section 855-10-25),
it is reasonably possible that the estimate will change in
the near term and the effect of the change will be material.
The estimate of the effect of a change in a condition,
situation, or set of circumstances that existed at the date
of the financial statements shall be disclosed and the
evaluation shall be based on known information available
before the financial statements are issued or are available
to be issued (as discussed in Section 855-10-25).
50-7 Various Topics require
disclosures about uncertainties addressed by those Topics.
In particular, Subtopic 450-20 specifies disclosures to be
made about contingencies that exist at the date of the
financial statements. In addition to disclosures required by
Topic 450 and other accounting Topics, this Subtopic
requires disclosures regarding estimates used in the
determination of the carrying amounts of assets or
liabilities or in disclosure of gain or loss contingencies,
as described below.
50-8
Disclosure regarding an estimate shall be made when known
information available before the financial statements are
issued or are available to be issued (as discussed in
Section 855-10-25) indicates that both of the following
criteria are met:
- It is at least reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that existed at the date of the financial statements will change in the near term due to one or more future confirming events.
- The effect of the change would be material to the financial statements.
ASC 360-10 also includes an example illustrating how an entity might
disclose information about a potential impairment.
ASC 360-10
Example 12: Specialized Equipment — Potential
Impairment
55-50 Offshore Industries is a
manufacturer of offshore drilling rigs and platforms. The
entity’s manufacturing process requires significant
specialized equipment, which it currently owns. As a result
of a decline in the price of oil, the demand for its
products and services has fallen dramatically in the past
two years, resulting in a significant underutilization of
its manufacturing capacity.
55-51 The entity depreciates its
investments in specialized equipment based on its original
estimate of the remaining useful lives of the equipment
using the units-of-production method, since it believes that
the exhaustion of usefulness of these specialized assets
relates more to their use than to the passage of time. The
entity reevaluates these estimates in light of current
conditions in accordance with generally accepted accounting
principles (GAAP). The entity also monitors the policies of
its major competitors and is aware that several have
reported large write-downs of similar assets. Nevertheless,
while the entity believes that it is at least reasonably
possible that its estimate that it will recover the carrying
amount of those assets from future operations will change
during the next year, it believes it is more likely that
conditions in the industry will improve and that no
write-down for impairment will be necessary.
55-52
The entity would make the following disclosure:
Offshore’s policy is to
depreciate specialized manufacturing equipment (with a net
book value of $25 million at December 31, 19X7) over its
remaining useful life using the units-of-production method
and to evaluate the remaining life and recoverability of
such equipment in light of current conditions. [Given the
excess capacity in the industry,] it is reasonably possible
that the entity’s estimate that it will recover the carrying
amount of this equipment from future operations will change
in the near term.
55-53 Regarding the preceding
illustrative disclosure, if the information in the first
sentence is already disclosed elsewhere in the notes, it
need not be repeated. Also, the bracketed material in the
second sentence represents an example of voluntary
disclosure that is encouraged by paragraph 275-10-50-9.
55-54 In this Example, the entity
acknowledges that the carrying amount of the specialized
assets is subject to significant uncertainty based on
current conditions. The uncertainty relates to the
measurement of the specialized assets at the date of the
financial statements, and the entity’s disclosure makes
clear that it is at least reasonably possible that the
carrying amount will change in the near term.
SEC Considerations
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. In addition, the SEC staff has stated that it expects
consistency between assumptions and estimates used to estimate expected
future cash flows for impairment analyses and MD&A. For example, the SEC
would challenge a registrant that uses pessimistic assumptions in estimating
expected future cash flows to support an impairment write-down while
describing an optimistic outlook for operations in MD&A. MD&A
disclosures should be consistent with management’s support for expected
future cash flows for testing impairment under ASC 360-10. See Section 8.8 for more
information about required impairment disclosures for SEC registrants.
Chapter 3 — Long-Lived Assets to Be Sold
Chapter 3 — Long-Lived Assets to Be Sold
3.1 Overview
ASC 360-10
Long-Lived Assets Classified as Held for Sale
35-37
This guidance addresses the accounting for expected disposal
losses for long-lived assets and asset groups that are
classified as held for sale but have not yet been sold. See
paragraphs 360-10-45-9 through 45-11 for the initial
criteria to be met for classification as held for sale.
An asset (disposal group) is classified as held for sale once all of the criteria in
ASC 360-10-45-9 through 45-11 are met. The entity recognizes a loss, if necessary,
to adjust the asset’s (disposal group’s) carrying amount to its fair value less cost
to sell in the period in which the held-for-sale criteria are met. The carrying
amount of the asset (disposal group) is adjusted in each reporting period for
subsequent increases or decreases in its fair value less cost to sell, except that
the adjusted carrying amount cannot exceed the carrying amount of the asset
(disposal group) at the time it was initially classified as held for sale. Any gain
or loss from the sale of the asset (disposal group) that was not previously
recognized is recognized on the date of sale. Long-lived assets are not depreciated
or amortized while they are classified as held for sale.
The held-for-sale guidance and the discontinued-operations presentation guidance in
ASC 205 and ASC 360 apply when an entity is planning to sell or otherwise dispose of
parts of its operations, not when the entity is being sold in its entirety. See
Example 5-2 for more information.
3.2 Grouping Assets to Be Sold
Assets may be sold individually or as part of a group of assets (and
possibly liabilities). The ASC master glossary defines a disposal group as
follows:
A disposal group for a long-lived asset or assets
to be disposed of by sale or otherwise represents assets to be disposed of
together as a group in a single transaction and liabilities directly associated
with those assets that will be transferred in the transaction. A disposal group
may include a discontinued operation along with other assets and liabilities
that are not part of the discontinued operation.
A disposal group may include not only long-lived assets that are
within the scope of ASC 360-10 but also other assets such as receivables, inventory,
indefinite-lived intangible assets, or goodwill. A disposal group may also “include
a discontinued operation along with other assets and liabilities that are not part
of the discontinued operation.” In addition, a disposal group may include
liabilities directly associated with the assets that will be transferred to the
buyer. Examples of such liabilities include environmental obligations, asset
retirement obligations, and mortgage obligations.
Further, certain operations to be sold may qualify for discontinued-operations
reporting even if the assets associated with those operations do not contain
long-lived assets that are within the scope of ASC 360-10 (e.g., an equity method
investment). For that reason, the same held-for-sale criteria in ASC 360-10-45-9
were incorporated into ASC 205-20-45-1E to allow entities to classify a component of
an entity as held for sale even though the component may not include long-lived
assets that are within the scope of ASC 360-10.
Connecting the Dots
For simplicity, the term “disposal group” is used throughout this publication
to refer to an asset, a group of assets (and possibly liabilities), or a
component of an entity that is classified as held for sale by the entity.
3.3 Held-for-Sale Criteria
ASC 360-10 {ASC 205-20}
360-10-45-9
{205-20-45-1E} A long-lived asset
(disposal group) to be sold {component of an entity or a
group of components of an entity, or a business or nonprofit
activity (the entity to be sold)}, shall be classified as
held for sale in the period in which all of the following
criteria are met:
-
Management, having the authority to approve the action, commits to a plan to sell the asset (disposal group) {entity to be sold}.
-
The asset (disposal group) {entity to be sold} is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (disposal groups) {entities to be sold}. (See Examples 5 through 7 [paragraphs 360-10-55-37 through 55-42], which illustrate when that criterion would be met.)
-
An active program to locate a buyer {or buyers} and other actions required to complete the plan to sell the asset (disposal group) {entity to be sold} have been initiated.
-
The sale of the asset (disposal group) {entity to be sold} is probable, and transfer of the asset (disposal group) {entity to be sold} is expected to qualify for recognition as a completed sale, within one year, except as permitted by paragraph 360-10-45-11 {205-20-45-1G}. (See Example 8 [paragraph 360-10-55-43], which illustrates when that criterion would be met.) The term probable refers to a future sale that is likely to occur.
-
The asset (disposal group) {entity to be sold} is being actively marketed for sale at a price that is reasonable in relation to its current fair value. The price at which a long-lived asset {an entity to be sold} is being marketed is indicative of whether the entity currently has the intent and ability to sell the asset (disposal group) {entity to be sold}. A market price that is reasonable in relation to fair value indicates that the asset (disposal group) {entity to be sold} is available for immediate sale, whereas a market price in excess of fair value indicates that the asset (disposal group) {entity to be sold} is not available for immediate sale.
-
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The sections below address the criteria for reporting a disposal group as held
for sale. Because the held-for-sale criteria in ASC 360-10-45-9 and ASC 205-20-45-1E
are the same, the discussion of the criteria in these sections applies to both
disposal groups under ASC 360-10-45-9 and components of an entity under ASC
205-20-45-1E.
Real estate entities should consider the guidance in ASC 970-360.
Specifically, ASC 970-360-35-3 states, in part:
The provisions in Subtopic 360-10 for long-lived assets to
be disposed of by sale shall apply to a real estate project, or parts
thereof, that is substantially completed and that is to be sold. The
provisions in that Topic for long-lived assets to be held and used shall
apply to real estate held for development, including property to be
developed in the future as well as that currently under development, and to
a real estate project, or parts thereof, that is substantially completed and
that is to be held and used (for example, for rental).
Thus, the held-for-sale criteria discussed in the sections below do
not apply to real estate projects, or portions of a real estate project, that are
substantially complete and that are to be sold. These properties are considered held
for sale regardless of whether they meet the held-for-sale criteria in ASC 360-10
(ASC 205-20).
3.3.1 Management, Having the Authority to Approve the Action, Commits to a Plan
To demonstrate that it is committed to a plan to sell, an entity should ensure
that the plan is formal and documented, identify the assets (and liabilities) to be
disposed of, and specify the actions necessary and expected timing to complete the
plan. We believe that a request from the board of directors or management to explore
options for selling would not constitute commitment to a plan to sell.
If, in addition to management approval, approval from the board of directors or
shareholders to sell is required or is sought by management, we believe that this
criterion cannot be met until such approval is obtained unless there is evidence
that approval has been effectively obtained. Approval might be effectively obtained,
for example, if approval from shareholders is required and shareholders holding a
majority of the voting shares have signed irrevocable agreements stating that they
will vote their shares in favor of the disposal.
Because of the increased governance power of the bankruptcy court or creditors’
committee, we believe that when an entity has filed for bankruptcy, the level of
authority that can commit to a plan to sell may be the bankruptcy court or the
creditors’ committee. Therefore, this criterion may not be met until such approval
is obtained.
Because this criterion is related to an evaluation of the entity’s commitment to
a plan to sell, the criterion in ASC 360-10-45-9(a) (ASC 205-20-45-1E(a)) may be met
even if the entity is awaiting third-party approval to sell the disposal group
(e.g., approval from a government agency, such as the Federal Trade Commission (FTC)
or the Federal Communications Commission (FCC), or approval from a lender). However,
an entity generally would have to assess any required third-party approval under
criterion (d) (see Section
3.3.4) to determine whether the sale is probable.
3.3.2 Available for Immediate Sale in Its Present Condition
The assets to be sold are available for immediate sale if the entity has the
intent and ability to sell them in their current condition. Some planned actions
by the seller before a disposal may indicate that the assets are not available
for immediate sale, while other planned actions in the normal course of business
(i.e., usual and customary) might indicate that they are.
Example 3-1
Completion of Plant
Overhauls Before Disposition by Sale
On March 1, 20X2, Company A announces plans to close and
sell one of its manufacturing facilities. Company A will
be required to perform certain major building and
equipment overhauls so that it can market the facility
effectively. The facility is closed on April 30, 20X2,
and the overhauls are completed on May 31, 20X2. After
the overhauls are completed, A begins marketing the
facility and the facility is sold on July 15, 20X2.
In this example, the criterion in ASC 360-10-45-9(b) (ASC
205-20-45-1E(b)) would not be met as of March 31, 20X2,
because the manufacturing facility is not “available for
immediate sale in its present condition.”
Example 3-2
Capital Expenditures Related to a Held-for-Sale Component in the Normal Course of Business
Company G owns and operates cable television franchises throughout the United
States. In June 20X7, G commits to a plan and enters
into an agreement to sell its Midwestern franchises to
Company J; the sale is subject to approval by the FCC.
The sales agreement requires G, while waiting for
regulatory approval, to continue to expand the cable
networks of the franchises to be sold, since new
subscribers are requesting service. Such capital
expenditures are common to all cable franchises, and G
would have to make these normal and customary
expenditures even if it did not sell the franchises.
In this example, the criterion in ASC 360-10-45-9(b) (ASC 205-20-45-1E(b)) would
be met because the capital expenditures that G is
required to make are usual and customary for the
operation of such assets.
Examples 5–7 in the implementation guidance in ASC 360-10-55-37 through 55-42
illustrate situations in which a disposal group is both available and not
available for immediate sale in its present condition. Because the held-for-sale
criteria in ASC 360-10 are the same as those in ASC 205-20, we believe that
these examples also provide interpretive guidance that applies to disposals
within the scope of ASC 205-20.
ASC 360-10
Example 5: Plan to Sell Headquarters Building
55-37 This Example
illustrates the classification as held for sale of a
long-lived asset (disposal group) in accordance with
paragraph 360-10-45-9(b).
55-38 An entity commits to a plan to sell its headquarters building and has initiated actions to locate a buyer.
The following illustrate situations in which the criterion in paragraph 360-10-45-9(b) would or would not be met:
- The entity intends to transfer the building to a buyer after it vacates the building. The time necessary to vacate the building is usual and customary for sales of such assets. The criterion in paragraph 360-10-45-9(b) would be met at the plan commitment date.
- The entity will continue to use the building until construction of a new headquarters building is completed. The entity does not intend to transfer the existing building to a buyer until after construction of the new building is completed (and it vacates the existing building). The delay in the timing of the transfer of the existing building imposed by the entity (seller) demonstrates that the building is not available for immediate sale. The criterion in paragraph 360-10-45-9(b) would not be met until construction of the new building is completed, even if a firm purchase commitment for the future transfer of the existing building is obtained earlier.
Example 6: Plan to Sell Manufacturing Facility With Backlog of Orders
55-39 This Example illustrates the classification as held for sale of a long-lived asset (disposal group) in
accordance with paragraph 360-10-45-9(b).
55-40 An entity commits to a plan to sell a manufacturing facility and has initiated actions to locate a buyer.
At the plan commitment date, there is a backlog of uncompleted customer orders. The following illustrate
situations in which the criterion in paragraph 360-10-45-9(b) would or would not be met:
- The entity intends to sell the manufacturing facility with its operations. Any uncompleted customer orders at the sale date would transfer to the buyer. The transfer of uncompleted customer orders at the sale date will not affect the timing of the transfer of the facility. The criterion in paragraph 360-10-45-9(b) would be met at the plan commitment date.
- The entity intends to sell the manufacturing facility, but without its operations. The entity does not intend to transfer the facility to a buyer until after it ceases all operations of the facility and eliminates the backlog of uncompleted customer orders. The delay in the timing of the transfer of the facility imposed by the entity (seller) demonstrates that the facility is not available for immediate sale. The criterion in paragraph 360-10-45-9(b) would not be met until the operations of the facility cease, even if a firm purchase commitment for the future transfer of the facility is obtained earlier.
Example 7: Intent to Sell Acquired Real Estate Foreclosure
55-41 This Example illustrates the classification as held for sale of a long-lived asset (disposal group) in
accordance with paragraph 360-10-45-9(b).
55-42 An entity acquires through foreclosure a real estate property that it intends to sell. The following
illustrate situations in which the criterion in paragraph 360-10-45-9(b) would not be met:
- The entity does not intend to transfer the property to a buyer until after it completes renovations to increase its sales value. The delay in the timing of the transfer of the property imposed by the entity (seller) demonstrates that the property is not available for immediate sale. The criterion in paragraph 360-10-45-9(b) would not be met until the renovations are completed.
- After the renovations are completed and the property is classified as held for sale but before a firm purchase commitment is obtained, the entity becomes aware of environmental damage requiring remediation. The entity still intends to sell the property. However, the entity does not have the ability to transfer the property to a buyer until after the remediation is completed. The delay in the timing of the transfer of the property imposed by others before a firm purchase commitment is obtained demonstrates that the property is not available for immediate sale. The criterion in paragraph 360-10-45-9(b) would not continue to be met. The property would be reclassified as held and used in accordance with paragraph 360-10-45-7.
3.3.3 An Active Program to Locate a Buyer and Other Actions Required to Complete the Plan Have Been Initiated
To meet this criterion, an entity must be actively seeking a buyer. Different
entities use different processes for identifying buyers. Some entities will
direct their employees to market the assets to be sold, while others will hire
third parties (e.g., investment bankers or brokers). Evidence that employees
have been directed to meet with potential buyers or that third parties have been
engaged to market the assets would indicate that the entity has an active
program to locate a buyer.
3.3.4 The Sale Is Probable and Is Expected to Be Complete Within One Year
The meaning of the term “probable” in this context is the same as that in ASC
450-20-20 and refers to a future sale that is likely to occur. There is no
bright-line or quantitative threshold for determining the meaning of probable;
however, it is a higher threshold than more likely than not. This criterion is often
the most difficult to assess because it requires management to consider the
likelihood that the sale will be completed. As part of this assessment, management
would typically consider factors such as its ability to close past sales
transactions, the ability of other entities in the same or similar industries to
complete sales transactions in the current environment, the market in which the
entity operates, and the buyer’s ability to obtain any necessary financing. Entities
should also consider whether third-party approval (e.g., approval from a government
agency, such as the FTC or the FCC, or approval from a lender) may be required and
the likelihood of obtaining such approval (see examples below). This criterion
should also be considered in conjunction with criterion (e) (see Section 3.3.5) because the
price at which the disposal group is being marketed is expected to affect the
probability that the sale will occur.
Example 8 in the implementation guidance in ASC 360-10-55-43 illustrates
situations in which proposed dispositions are not expected to qualify as completed
sales.
ASC 360-10
Example 8: Proposed Disposition Not Expected to Qualify as Completed Sale
55-43 This Example illustrates the
classification as held for sale of a long-lived asset
(disposal group) in accordance with the criterion in
paragraph 360-10-45-9(d). The following illustrates
situations in which that criterion would not be met:
-
An entity that is a commercial leasing and finance company is holding for sale or lease equipment that has recently come off lease and the ultimate form of a future transaction (sale or lease) has not yet been determined.
-
An entity commits to a plan to sell an asset that is in use and lease back that asset; however, the transfer of the asset will not be accounted for as a sale and leaseback transaction because the buyer-lessor does not obtain control of the asset based on the guidance in paragraphs 842-40-25-1 through 25-3. The asset would continue to be classified as held and used following the appropriate guidance in Sections 360-10-35, 360-10-45, and 360-10-50.
To meet this criterion, the entity must also expect that the disposal group will
be sold within one year from the date on which it meets the held-for-sale criteria.
However, ASC 360-10-45-11 and ASC 205-20-45-1G contain an exception to the one-year
requirement if the delay results from events or circumstances beyond the entity’s
control and management continues to be committed to the plan of sale and is
performing actions necessary to respond to the conditions causing the delay. See
Examples 9–11 in the implementation guidance in ASC 360-10-55-44 through 55-49
below.
Example 8 in ASC 360-10 includes guidance on meeting this criterion
for sale-and-leaseback transactions. Under ASC 842, if the entity plans to enter
into a sale-and-leaseback transaction and it is probable that the sale requirements
under ASC 842-20 will be met within a year, this criterion would most likely be met.
(See Deloitte’s Roadmap Leases for more information.)
ASC 360-10 {ASC 205-20}
360-10-45-11 {205-20-45-1G} Events or circumstances beyond an entity’s control may extend the period
required to complete the sale of a long-lived asset (disposal group) {an entity to be sold} beyond one year.
An exception to the one-year requirement in paragraph 360-10-45-9(d) {205-20-45-1E(d)} shall apply in the
following situations in which such {those} events or circumstances arise:
- If at the date {that} an entity commits to a plan to sell a long-lived asset (disposal group) {an entity to be sold}, the entity reasonably expects that others (not a buyer) will impose conditions on the transfer of the asset (group) {entity to be sold} that will extend the period required to complete the sale and both of the following conditions are met:
- Actions necessary to respond to those conditions cannot be initiated until after a firm purchase commitment is obtained.
- A firm purchase commitment is probable within one year. (See Example 9 [paragraph 360-10-55-44], which illustrates that situation.)
- If an entity obtains a firm purchase commitment and, as a result, a buyer or others unexpectedly impose conditions on the transfer of a long-lived asset (disposal group) {an entity to be sold} previously classified as held for sale that will extend the period required to complete the sale and both of the following conditions are met:
- Actions necessary to respond to the conditions have been or will be timely initiated.
- A favorable resolution of the delaying factors is expected. (See Example 10 [paragraph 360-10-55-46], which illustrates that situation.)
- If during the initial one-year period, circumstances arise that previously were considered unlikely and, as a result, a long-lived asset (disposal group) {an entity to be sold} previously classified as held for sale is not sold by the end of that period and all of the following conditions are met:
- During the initial one-year period{,} the entity initiated actions necessary to respond to the change in circumstances.
- The asset (group) {entity to be sold} is being actively marketed at a price that is reasonable given the change in circumstances.
- The criteria in paragraph 360-10-45-9 {205-20-45-1E} are met. (See Example 11 [paragraph 360-10-55-48], which illustrates that situation.)
Examples 9–11 in the implementation guidance in ASC 360-10-55-44 through 55-49
illustrate situations that may or may not qualify for an exception to the one-year
requirement.
ASC 360-10
Example 9: Regulatory Approval of Sale Required
55-44 This Example illustrates an exception to the one-year requirement in paragraph 360-10-45-9(d) to
complete the sale of a long-lived asset (disposal group) (see paragraph 360-10-45-11). The following illustrates
situations in which the conditions for an exception to the criterion in paragraph 360-10-45-9(d) would be met.
55-45 An entity in the utility industry commits to a plan to sell a disposal group that represents a significant
portion of its regulated operations. The sale will require regulatory approval, which could extend the period
required to complete the sale beyond one year. Actions necessary to obtain that approval cannot be
initiated until after a buyer is known and a firm purchase commitment is obtained. However, a firm purchase
commitment is probable within one year. In that situation, the conditions in paragraph 360-10-45-11(a) for an
exception to the one-year requirement in paragraph 360-10-45-9(d) would be met.
Example 10: Environmental Damage Identified During Buyer’s Inspection
55-46 This Example illustrates an exception to the one-year requirement in paragraph 360-10-45-9(d) to
complete the sale of a long-lived asset (disposal group) (see paragraph 360-10-45-11). The following illustrates
a situation in which the conditions for an exception to the criterion in paragraph 360-10-45-9(d) would be met.
55-47 An entity commits to a plan to sell a manufacturing facility in its present condition and classifies the
facility as held for sale at that date. After a firm purchase commitment is obtained, the buyer’s inspection of
the property identifies environmental damage not previously known to exist. The entity is required by the
buyer to remediate the damage, which will extend the period required to complete the sale beyond one year.
However, the entity has initiated actions to remediate the damage, and satisfactory remediation of the damage
is probable. In that situation, the conditions in paragraph 360-10-45-11(b) for an exception to the one-year
requirement in paragraph 360-10-45-9(d) would be met.
Example 11: Deterioration of Market Conditions
55-48 This Example illustrates an exception to the one-year requirement in paragraph 360-10-45-9(d) to
complete the sale of a long-lived asset (disposal group) (see paragraph 360-10-45-11).
55-49 An entity commits to a plan to sell a long-lived asset and classifies the asset as held for sale at that
date. The following illustrates situations in which the conditions for an exception to the criterion in paragraph
360-10-45-9(d) would or would not be met:
- During the initial one-year period, the market conditions that existed at the date the asset was classified initially as held for sale deteriorate and, as a result, the asset is not sold by the end of that period. During that period, the entity actively solicited but did not receive any reasonable offers to purchase the asset and, in response, reduced the price. The asset continues to be actively marketed at a price that is reasonable given the change in market conditions, and the criteria in paragraph 360-10-45-9 are met. In that situation, the conditions in paragraph 360-10-45-11(c) for an exception to the one-year requirement in paragraph 360-10-45-9(d) would be met. At the end of the initial one-year period, the asset would continue to be classified as held for sale.
- During the following one-year period, market conditions deteriorate further, and the asset is not sold by the end of that period. The entity believes that the market conditions will improve and has not further reduced the price of the asset. The asset continues to be held for sale, but at a price in excess of its current fair value. In that situation, the absence of a price reduction demonstrates that the asset is not available for immediate sale as required by the criterion in paragraph 360-10-45-9(b). In addition, the criterion in paragraph 360-10-45-9(e) requires that an asset be marketed at a price that is reasonable in relation to its current fair value. Therefore, the conditions in paragraph 360-10-45-11(c) for an exception to the one-year requirement in paragraph 360-10-45-9(d) would not be met. The asset would be reclassified as held and used in accordance with paragraph 360-10-35-44.
3.3.5 Actively Marketed at a Reasonable Price
The price at which the disposal group is being marketed indicates whether
management is committed to selling it and the likelihood that a sale will be
completed. A market price that is reasonable compared with the disposal group’s fair
value indicates that it is available for immediate sale, whereas a market price in
excess of fair value indicates that it is not available for immediate sale, that it
is not probable that the sale will occur, or that the entity is simply exploring the
market’s receptiveness to the sale of an asset group as opposed to being committed
to it.
3.3.6 Unlikely That Significant Changes Will Be Made to the Plan or the Plan Will Be Withdrawn
As discussed above, we believe that for an entity to meet the criterion
discussed in Section
3.3.1, it should have a formal and documented plan that identifies
the assets (and liabilities) to be sold, actions necessary to complete the plan, and
expected timing of the plan’s completion. Even when the plan is formal and
documented, an entity must evaluate the plan to determine whether significant
changes are unlikely. When evaluating this criterion, the entity should consider the
specific facts and circumstances related to the plan as well as whether it has a
history of changing its plans of sale. Further, entities undergoing or expecting
management changes (e.g., new CEO, new board members) should consider whether new
management will be committed to the plan or will seek to modify or withdraw the
plan.
3.4 Including Specific Items in a Disposal Group
The sections below provide guidance on determining whether certain items should be included in a
disposal group.
3.4.1 Goodwill
ASC 350-20
40-1 When a
reporting unit is to be disposed of in its entirety,
goodwill of that reporting unit shall be included in the
carrying amount of the reporting unit in determining the
gain or loss on disposal.
40-2 When a
portion of a reporting unit that constitutes a business (see
Section 805-10-55) or nonprofit activity is to be disposed
of, goodwill associated with that business or nonprofit
activity shall be included in the carrying amount of the
business or nonprofit activity in determining the gain or
loss on disposal.
40-3 The
amount of goodwill to be included in that carrying
amount shall be based on the relative fair values of the
business or nonprofit activity to be disposed of and the
portion of the reporting unit that will be retained. For
example, if a reporting unit with a fair value of $400
is selling a business or nonprofit activity for $100 and
the fair value of the reporting unit excluding the
business or nonprofit activity being sold is $300, 25
percent of the goodwill residing in the reporting unit
would be included in the carrying amount of the business
or nonprofit activity to be sold.
40-4 However,
if the business or nonprofit activity to be disposed of
was never integrated into the reporting unit after its
acquisition and thus the benefits of the acquired
goodwill were never realized by the rest of the
reporting unit, the current carrying amount of that
acquired goodwill shall be included in the carrying
amount of the business or nonprofit activity to be
disposed of.
40-5 That
situation might occur when the acquired business or
nonprofit activity is operated as a standalone entity or
when the business or nonprofit activity is to be
disposed of shortly after it is acquired.
40-6
Situations in which the acquired business or nonprofit
activity is operated as a standalone entity are expected
to be infrequent because some amount of integration
generally occurs after an acquisition.
40-7 When only a portion of
goodwill is allocated to a business or nonprofit
activity to be disposed of, the goodwill remaining in
the portion of the reporting unit to be retained shall
be tested for impairment in accordance with paragraphs
350-20-35-3A through 35-13 using its adjusted carrying
amount.
Entities may need to include goodwill in a disposal group even if goodwill was
not assigned to the asset group while the assets were classified as held and
used in accordance with ASC 360-10-35-26 (see Section 2.3.2).
The following table describes
how goodwill should be allocated to disposal groups in various
circumstances:
Assigning Goodwill to Disposal
Groups
| |
---|---|
Disposal group is a reporting unit or a group of
reporting units.
|
The goodwill assigned to the reporting unit(s) is
included in the carrying amount of the disposal group in
accordance with ASC 350-20-40-1.
|
Disposal group represents a portion of one or more
reporting units and constitutes a business under ASC
805-10.
|
Goodwill should be allocated to the disposal group in
accordance with ASC 350-20-40-2 through 40-6, generally
on a relative fair value basis (unless the business was
never integrated into the reporting unit).
In addition, under ASC 350-20-40-7, the
goodwill remaining in the portion of the reporting unit
to be retained by the entity must be tested for
impairment.
|
Disposal group represents a portion of one or more
reporting units but does not constitute a business under
ASC 805-10.
|
Goodwill should not be allocated to the disposal group
because goodwill is only derecognized when a business is
disposed of or when goodwill is impaired.
However, the entity should consider
whether the disposal would result in a triggering event
and thus whether the entity would be required to perform
impairment testing of the goodwill of the reporting
unit(s) from which the assets were disposed of.
|
When a disposal group is classified as held for sale and meets the criteria for
reporting in discontinued operations, an entity must reclassify the assets and
liabilities of the disposal group in the prior-period balance sheets (see
Section 7.2).
We believe that goodwill related to a disposal group that is a reporting unit or
that meets the definition of a business should also be included with the assets
and liabilities of the discontinued operation in those prior periods.
When determining whether goodwill should be allocated to a
disposal of a portion of a reporting unit, entities should apply the definition
of a business, as clarified in ASU
2017-01, regardless of whether the assets disposed of were
acquired and determined to be a business under previous guidance. For more
information about determining whether a disposal group meets the definition of a
business in ASC 805-10, see Section 2.4 of
Deloitte’s Roadmap Business
Combinations.
In addition, see Section
7.4.1 for guidance on including goodwill impairment charges in
discontinued operations.
Example 3-3
Assigning Goodwill
to a Disposal Group
Company A acquires Company B in a
business combination. Company A retains B as a separate
subsidiary, and B elects to apply pushdown accounting in
its separate financial statements. Company A recognizes
goodwill of $200 from the acquisition of B in its
consolidated financial statements. In applying pushdown
accounting, B recognizes $200 of goodwill in its
separate financial statements. Company A determines that
B represents a separate reporting unit in accordance
with ASC 350-20.
On the basis of the expected synergies from the
acquisition of B, A assigns $150 of the $200 of
recognized goodwill to B and $50 to Subsidiary X, a
different reporting unit of A. For purposes of A’s
consolidated financial statements, when A tests its B
reporting unit for impairment, it will test goodwill of
$150, which was the amount assigned to the B reporting
unit. ASC 350-20 also requires that subsidiaries that
issue separate financial statements test goodwill at the
subsidiary level by using the subsidiary’s reporting
units. Subsidiary B will test the goodwill of $200
recognized in its separate financial statements. Any
impairment loss recognized in B’s separate financial
statements would not necessarily result in an impairment
loss in A’s consolidated financial statements, but it
may represent a triggering event for A.
If A were to dispose of B in its entirety, A would only
include the $150 of assigned goodwill in determining the
gain or loss on the disposal of B. To appropriately
account for the gain or loss on disposal in its
consolidated financial statements, A would therefore
need to make an adjustment at the consolidated level to
exclude $50 of goodwill assigned to X from the disposed
assets. Just as if A were to dispose of X in its
entirety, A would include the assigned goodwill amount
of $50 in calculating the gain or loss on the disposal.
To appropriately account for the gain or loss on
disposal, A would therefore need to make an adjustment
at the consolidated level to include the $50 of goodwill
assigned to X with X’s disposed assets.
3.4.2 Cumulative Translation Adjustment and Other Items of Accumulated Other Comprehensive Income
ASC 830-30-45-13 states, in part, that “an entity that has committed to a plan
that will cause the cumulative translation adjustment [CTA] for an equity method
investment or a consolidated investment in a foreign entity to be reclassified
to earnings shall include the [CTA] as part of the carrying amount of the
investment when evaluating that investment for impairment.” Therefore, the
carrying value of a disposal group should include the CTA that will be
eliminated upon sale once the disposal group is classified as held for sale. If
unrealized gains in AOCI are not included in the carrying amount of the disposal
group, a loss may be recognized in the period in which the disposal group is
classified as held for sale, and a subsequent gain may be recognized when the
disposition occurs. Alternatively, if unrealized losses in AOCI are not included
in the carrying amount of the disposal group, a loss that might otherwise be
measured might be deferred until the disposition occurs.
The CTA should remain classified in equity until the disposal group is sold (or
disposed of other than by sale) on the basis of the guidance in ASC 830-30-40-1,
which states:
Upon sale or upon complete or substantially
complete liquidation of an investment in a foreign entity, the amount
attributable to that entity and accumulated in the translation adjustment
component of equity shall be both:
-
Removed from the separate component of equity
-
Reported as part of the gain or loss on sale or liquidation of the investment for the period during which the sale or liquidation occurs.
For an illustration of how OCI would be treated in the testing of the disposal of
a foreign entity for impairment, see Example
5-24 in Deloitte’s Roadmap Foreign
Currency Matters.
Furthermore, the FASB’s implementation group regarding foreign currency matters indicated in its
meeting minutes that:
Paragraph 14 [of FASB Statement 52 (codified in ASC 830-30-40-1)] states that the translation component is
removed from equity and reported as part of the gain or loss on sale or complete or substantially complete
liquidation. We believe the timing of loss and gain recognition remains consistent with the provisions of [FASB
Statement 5 (codified in ASC 450)] and APB Opinion 30 (codified in ASC 225-20)].
Therefore, the CTA should be reclassified out of equity in the period in which the disposal occurs but the CTA balance related to prior periods should not be reclassified.
While ASC 830-30-40-1 and ASC 830-30-45-13 address foreign currency translation
adjustments, there is no specific U.S. GAAP guidance on the treatment of other
items included in AOCI (e.g., unrealized holding gains and losses on
available-for-sale debt securities, gains and losses related to postretirement
benefits) in the assessment of a disposal group for impairment. However, we
believe that it is appropriate to analogize to that guidance for all items of
AOCI. See Section
2.3.6 for more information about situations in which an asset
group does not yet meet the criteria to be classified as held for sale. For more
information about testing a foreign entity for impairment and the
reclassification of the CTA out of equity, see Deloitte’s Roadmap Foreign Currency
Matters.
3.5 Measuring the Carrying Value of a Disposal Group Upon Classification as Held for Sale
ASC 360-10
Long-Lived Assets Classified as Held for Sale
35-37 This guidance addresses the accounting for expected disposal losses for long-lived assets and asset
groups that are classified as held for sale but have not yet been sold. See paragraphs 360-10-45-9 through 45-11 for the initial criteria to be met for classification as held for sale.
35-41 See paragraphs
310-20-35-12D and 310-20-40-12 for guidance related to
determination of cost basis for foreclosed assets under
Subtopic 310-20 and the measurement of cumulative losses
previously recognized under paragraph 360-10-35-40.
35-42 See paragraphs 830-30-45-13 through 45-15 for guidance regarding the application of Topic 830 to an
investment being evaluated for impairment that will be disposed of.
Accounting While Held for Sale
35-43 A long-lived asset (disposal group) classified as held for sale shall be measured at the lower of its
carrying amount or fair value less cost to sell. If the asset (disposal group) is newly acquired, the carrying
amount of the asset (disposal group) shall be established based on its fair value less cost to sell at the
acquisition date. A long-lived asset shall not be depreciated (amortized) while it is classified as held for sale.
Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale shall
continue to be accrued.
ASC 205-20
45-3C A gain or loss recognized on the disposal (or loss recognized on classification as held for sale) of a discontinued operation shall be calculated in accordance with the guidance in other Subtopics. For example, if a discontinued operation is within the scope of Topic 360 on property, plant, and equipment, an entity shall follow the guidance in paragraphs 360-10-35-37 through 35-45 and 360-10-40-5 for calculating the gain or loss recognized on the disposal (or loss on classification as held for sale) of the discontinued operation.
ASC 360-10 provides guidance on how to measure a disposal group upon its
classification as held for sale. Although ASC 205-20 does not provide such guidance,
it refers to the guidance in ASC 360-10 on measuring long-lived assets or the
guidance in other standards on measuring assets that are not within the scope of ASC
360-10. However, ASC 205-20 does not incorporate all of the guidance from ASC
360-10. To the extent that ASC 205-20 does not provide specific guidance, we believe
that entities should look to the guidance in ASC 360-10. Therefore, assets (and
liabilities) that are classified as held for sale are measured in the same manner
(i.e., lower of carrying amount or fair value less cost to sell) regardless of
whether they qualify for discontinued-operations reporting.
A disposal group that is classified as held for sale is measured “at the lower
of its carrying amount or fair value less cost to sell” in the period in which the
held-for-sale criteria are met. To determine the carrying value of the disposal
group, an entity must determine whether any of the assets in the disposal group are
impaired before comparing the group’s carrying value with its fair value less cost
to sell (see Section
3.5.1). If the carrying amount of the disposal group exceeds its fair
value less cost to sell even after any impairment charges have been recognized, the
entity will recognize an additional loss to write the disposal group down to its
fair value less cost to sell.
Under ASC 205-20-45-11, “Any loss recognized on a discontinued operation
classified as held for sale in accordance with paragraphs 205-20-45-3B through 45-3C
shall not be allocated to the major classes of assets and liabilities of the
discontinued operation.” Therefore, an entity typically presents a valuation
allowance or contra asset account to adjust the component to its fair value less
cost to sell when presenting the major classes of assets. The valuation allowance or
contra asset account is adjusted for any subsequent changes in the entity’s estimate
of fair value less cost to sell. Although ASC 360-10 does not provide guidance
similar to that in ASC 205-20-45-11, we believe that the same principle may be
applied to disposal groups that do not qualify for reporting as a discontinued
operation. In addition, the measurement guidance in ASC 360-10 does not apply to
foreclosed assets accounted for under ASC 310-40 or investments accounted for under
ASC 830.
3.5.1 Order of Impairment Testing When a Disposal Group Is Held for Sale
ASC 360-10
35-39 The carrying amounts of
any assets that are not covered by this Subtopic,
including goodwill, that are included in a disposal
group classified as held for sale shall be adjusted in
accordance with other applicable GAAP prior to measuring
the fair value less cost to sell of the disposal group.
Paragraphs 350-20-40-1 through 40-7 provide guidance for
allocating goodwill to a lower-level asset group to be
disposed of that is part of a reporting unit and that
constitutes a business. Goodwill is not included in a
lower-level asset group to be disposed of that is part
of a reporting unit if it does not constitute a
business.
As indicated in Section 3.2, a disposal group may include
not only long-lived assets that are within the scope of ASC 360-10 but also
other assets such as receivables, inventory, indefinite-lived intangible assets,
or goodwill. When assets other than long-lived assets are present within a
disposal group, it is necessary for an entity to follow a required order for
testing the assets within the disposal group when recognizing the disposal group
at the lower of its carrying amount or fair value less cost to sell. The
following flowchart illustrates the required order of impairment testing when
assets are classified 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.
Example 3-4
In December 20X1, Entity L plans to dispose of Business B
and determines that the disposal meets the criteria to
be classified as held for sale in L’s year-end financial
statements in accordance with ASC 360-10. Business B is
currently part of a larger reporting unit that also
includes Business A. In accordance with ASC 350, L would
allocate a portion of the reporting unit’s goodwill to
the business that is classified as held for sale on the
basis of the relative fair values of the respective
businesses:
Accordingly, L allocates $30 of the carrying value of
goodwill ($75) to B ([$100 ÷ $250] × $75). The carrying
value of goodwill retained by the reporting unit after
the sale of B is $45 ([$150 ÷ $250] × $75). Entity L
then tests the goodwill related to the retained portion
of the reporting unit (i.e., A) for impairment in
accordance with ASC 350. The goodwill attributable to
the disposal group (i.e., B) would be tested as part of
the disposal group both at the time the disposal group
qualifies as held for sale and then prospectively until
it is sold.
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.
3.5.2 Measuring the Fair Value of a Disposal Group
The fair value of a disposal group is measured in accordance with ASC 820. ASC 820 does not require entities to use a specific valuation technique for measuring fair value. However, ASC 360-10-35-36 indicates that “for long-lived assets (asset groups) that have uncertainties both in timing and amount, an expected present value technique will often be the appropriate technique with which to estimate fair value.” Entities should use all available evidence in determining the fair value of a disposal group.
Example 3-5
Company T determines that a long-lived asset meets the criteria to be classified
as held for sale in its year-end financial statements
and, in accordance with ASC 360-10, reduces the asset’s
carrying value to its estimated fair value less cost to
sell. After year-end but before its financial statements
are issued, T enters into an agreement to sell the asset
for an amount less than the estimated fair value used in
the measurement of the asset’s carrying amount as of the
reporting date.
Company T should evaluate whether the evidence of fair value provided by the
agreement to sell reached after the balance sheet date
is indicative of conditions that existed as of the
balance sheet date. If T concludes that the agreed-upon
sales price constitutes additional evidence of the
asset’s fair value as of the balance sheet date, T
should reflect that fair value in assessing fair value
less cost to sell as of the balance sheet date.
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).
3.5.2.1 Foreclosed Assets (For Entities That Have Adopted ASU 2016-13)
ASC 360-10
35-41 See paragraphs
310-20-35-12D and 310-20-40-12 for guidance related
to determination of cost basis for foreclosed assets
under Subtopic 310-20 and the measurement of
cumulative losses previously recognized under
paragraph 360-10-35-40.
ASC 360-10-35-41 provides an exception from the general
measurement provisions for held-for-sale assets for foreclosed assets. That
is, ASC 310-20-40-3 states:
A creditor that receives long-lived assets that will
be sold from a debtor in full satisfaction of a receivable shall
account for those assets at their fair value less cost to sell, as
that term is used in paragraph 360-10-35-43. The excess of the
amortized cost basis satisfied over the fair value of assets
received (less cost to sell, if required above) is a loss that shall
be recognized. For purposes of this paragraph, losses, to the extent
they are not offset against allowances for uncollectible amounts or
other valuation accounts, shall be included in measuring net income
for the period. The amortized cost basis is used in paragraphs
310-40-25-1 through 25-2; 310-40-35-7; 310-40-40-2 through 40-8; and
310-40-50-1 instead of carrying amount of the receivable because the
latter is net of an allowance for estimated uncollectible amounts or
other valuation account, if any, while the former is not.
In addition, in accordance with ASC 360-10-45-12, if the lender acquires
foreclosed assets but intends to resell them in a short period of time,
entities must 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:
- “[T]he 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).”
See Section 3.5.5 for more information
about newly acquired assets that the entity intends to sell upon
acquisition.
3.5.3 Costs to Sell
ASC 360-10
Measurement of Expected Disposal Loss or Gain
35-38 Costs 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. Those costs include broker commissions, legal and title transfer fees, and closing costs that must be incurred before legal title can be transferred. Those costs exclude expected future losses associated with the operations of a long-lived asset (disposal group) while it is classified as held for sale. Expected future operating losses that marketplace participants would not similarly consider in their estimates of the fair value less cost to sell of a long-lived asset (disposal group) classified as held for sale shall not be indirectly recognized as part of an expected loss on the sale by reducing the carrying amount of the asset (disposal group) to an amount less than its current fair value less cost to sell. If the sale is expected to occur beyond one year as permitted in limited situations by paragraph 360-10-45-11, the cost to sell shall be discounted.
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.
3.5.4 Loss That Exceeds the Carrying Amount of Long-Lived Assets Within the Disposal Group
In some cases, the loss that would be incurred to write down a disposal group to
its fair value less costs to sell may exceed the carrying amount of the
long-lived assets within that group. Views differ on how to account for such an
excess.
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:
[T]he Board decided that because other accounting
pronouncements prescribe the accounting for assets and liabilities not
covered by this Statement that are included in a disposal group, a loss recognized for a disposal group classified as
held for sale should reduce only the carrying amounts of the long-lived
assets of the group. The Board concluded that the allocation method
for a loss recognized for a disposal group classified as held for sale
provides a reasonable basis for reporting both the assets and liabilities of
the disposal group in the statement of financial position. [Emphasis
added]
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:
Consider a fact pattern in which a disposal group held for
sale was established that consisted of long-lived assets in the form of
property & equipment, as well as other assets such as trade receivables,
and inventory. An estimate of the group’s fair value, less its costs to
sell, was lower than the group’s carrying value. Further, the difference
between the disposal group’s fair value and its carrying value exceeded the
existing net book value of long-lived assets. This might lead you to a
question: “Should you recognize a liability for the loss in excess of the
carrying amount of the long-lived assets, and, if so, what does it
represent?”
I can think of two views for this particular fact pattern.
One approach is to record the loss in excess of the carrying amount of the
long-lived assets as a reduction to the carrying value of the entire group,
effectively reducing trade receivables and inventory. A second approach is
to limit the impairment to the carrying value of the long-lived assets in
the disposal group.
The first view interprets
paragraph 34 of Statement 144 [codified as ASC 360-10-35-43] to redefine the
unit of account as the disposal group and to record it at the lower of its
carrying amount or fair value less cost to sell. In effect, the individual
assets lose their identity, even though the recoverability of AR and
inventory are addressed by other GAAP.
The second
view looks at paragraph 37 of Statement 144 [codified as ASC 360-10-35-40],
which indicates a “loss . . . shall adjust only the carrying amount of a
long-lived asset, whether classified as held for sale individually or as
part of a disposal group.” This approach would limit the loss to the
carrying value of the long-lived assets. There seems to be an additional
level of simplicity in the second view in that it does not result in the
recognition of what, in effect, is a liability created by an asset
impairment model. . . .
After considering these
two views, we ultimately concluded that we would not object to either
interpretation of the literature. If companies expect to incur a loss on
sale in excess of the impairment associated with long-lived assets, it may
be an indicator that other assets such as AR and inventory are impaired. In
any event, we believe that registrants who use the first view should clearly
disclose where such amounts are reflected in the financial statements and
whether additional losses are expected in the future.
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.
3.5.5 Newly Acquired Long-Lived Assets
ASC 360-10
Newly Acquired Asset Classified as Held for Sale
45-12 A long-lived asset
(disposal group) that is newly acquired and that will be
sold rather than held and used shall be classified as
held for sale at the acquisition date only if the
one-year requirement in paragraph 360-10-45-9(d) is met
(except as permitted by the preceding paragraph) and any
other criteria in paragraph 360-10-45-9 that are not met
at that date are probable of being met within a short
period following the acquisition (usually within three
months).
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.
Footnotes
1
See also Section 3.5.4 for an
excerpt from prepared remarks by Adam Brown, a professional accounting
fellow in the SEC’s Office of the Chief Accountant, at the 2008 AICPA
Conference on Current SEC and PCAOB Developments.
3.6 Subsequent Measurement While a Disposal Group Is Classified as Held for Sale
ASC 360-10
35-40 A loss shall be recognized for any initial or subsequent write-down to fair value less cost to sell. A gain shall be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized (for a write-down to fair value less cost to sell). The loss or gain shall adjust only the carrying amount of a long-lived asset, whether classified as held for sale individually or as part of a disposal group.
The fair value less costs to sell of a disposal group must be reassessed in each
reporting period in which it is classified as held for sale. In
accordance with ASC 360-10-35-40, “[a] loss shall be recognized for
any initial or subsequent write-down to fair value less cost to
sell” while “[a] gain shall be recognized for any subsequent
increase in fair value less cost to sell, but not in excess of the
cumulative loss previously recognized (for a write-down to fair
value less cost to sell).”
Example 3-6
On January 31, 20X8, Company T announces a plan to move to a new corporate headquarters. According to the plan, T expects to vacate and sell the company-owned office building that currently houses its corporate headquarters. On April 30, 20X8, T completes the move and has met the criteria to classify the property as held for sale. As of that date, the carrying value of the property is $21 million and T estimates that the fair value less cost to sell is $16 million (including $1 million in estimated sale costs). Accordingly, T recognizes a loss of $5 million.
As of December 31, 20X8, T had not yet sold the property; however, because of
improved conditions in the real estate market, T
estimates that the fair value less costs to sell
of the property is $18 million. Therefore, in its
December 31, 20X8, financial statements, T
recognizes a gain of $2 million because the
increase is less than the cumulative loss
previously recognized.
3.6.1 Depreciation and Amortization
Long-lived assets to be sold will be recovered through sale and not through future operations. Therefore, long-lived assets are not depreciated or amortized once they are classified as held for sale in accordance with ASC 360-10-35-43. Although an entity may still be using the assets and obtaining benefits from their use, the FASB concluded, as noted in FASB Statement 144, that continuing to depreciate or amortize them is “inconsistent with the use of a lower of carrying amount or fair value measure for a long-lived asset classified as held for sale.”
In addition, because ROU assets are within the scope of ASC
360-10, we believe that the guidance in ASC 360-10-35-43
applies to ROU assets included in a disposal group.
Therefore, entities should cease amortization of any ROU
assets once the disposal group meets the held-for-sale
criteria, just as they would for any other asset within the
scope of ASC 360-10, even though the interest on any related
lease liabilities should continue to be accreted in
accordance with ASC 842.
3.7 Long-Lived Assets to Be Disposed of in Exchange for Noncash Assets in a Transaction Accounted for at Fair Value
Sometimes a disposal group is to be disposed of in exchange for an
asset or assets other than cash. If the disposal group is to be exchanged in a
transaction accounted for at fair value, we believe that it should be classified as
held for sale once the classification criteria are met. That is, regardless of
whether the form of the consideration received is cash or noncash assets, such an
exchange would represent a sale of the disposal group. The following are examples of
exchange transactions accounted for at fair value:
- Contributions of long-lived assets to an entity in exchange for a noncontrolling investment in that entity (e.g., an equity method investment or a joint venture investment).
- A nonmonetary exchange that does not meet any of the conditions in ASC 845-10-30-3 and is therefore measured at fair value. (See Section 4.3 for information on situations in which the nonmonetary exchange meets any of those conditions and must be accounted for at its carrying amount.)
3.8 Recognition of a Gain or Loss Upon Sale of the Disposal Group
ASC 360-10
40-3A An entity
shall account for the derecognition of a nonfinancial asset,
including an in substance nonfinancial asset and an asset
subject to a lease, within the scope of this Topic in
accordance with Subtopic 610-20 on gains and losses from the
derecognition of nonfinancial assets, unless a scope
exception from Subtopic 610-20 applies. For example, the
derecognition of a nonfinancial asset in a contract with a
customer shall be accounted for in accordance with Topic 606
on revenue from contracts with customers.
40-3B An entity
shall account for the derecognition of a subsidiary or group
of assets that is either a business or nonprofit activity in
accordance with the derecognition guidance in Subtopic
810-10.
40-3C If an
entity transfers a nonfinancial asset in accordance with
paragraph 360-10-40-3A, and the contract does not meet all
of the criteria in paragraph 606-10-25-1, the entity shall
not derecognize the nonfinancial asset and shall follow the
guidance in paragraphs 606-10-25-6 through 25-8 to determine
if and when the contract subsequently meets all the criteria
in paragraph 606-10-25-1. Until all the criteria in
paragraph 606-10-25-1 are met, the entity shall continue to
do all of the following:
- Report the nonfinancial asset in its financial statements
- Recognize depreciation expense as a period cost unless the assets have been classified as held for sale in accordance with paragraphs 360-10-45-9 through 45-10
- Apply the impairment guidance in Section 360-10-35.
Recognition of Gain or
Loss From Sale
40-5 A gain or
loss not previously recognized that results from the sale of
a long-lived asset (disposal group) shall be recognized when
the long-lived asset (disposal group) is derecognized in
accordance with applicable Topics (for example, Topic 610 on
other income, Topic 810 on consolidation, or Topic 860 on
transfers and servicing).
ASC 360-10-40-5 specifies that an entity recognizes any previously unrecognized
gain or loss from the sale of the disposal group when derecognizing the assets,
liabilities, and AOCI in accordance with applicable GAAP. The following decision
tree from ASC 610-20 depicts the process for determining which guidance an entity
should apply when derecognizing a disposal group, depending on the nature of the
assets or the transaction.
ASC 610-20
15-10 The following decision tree depicts the process for evaluating whether assets promised to a counterparty in a contract (or parts of a contract) shall be derecognized within the scope of this Subtopic. The decision tree is not intended as a substitute for the guidance in this Subtopic.
For more information about the application of ASC 610-20, see Deloitte’s Roadmap
Revenue
Recognition. For more information about the application of ASC
810, see Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial
Interest.
3.9 Changes to a Plan of Sale
ASC 360-10
Changes to a Plan of Sale
35-44 If circumstances arise that previously were considered unlikely and, as a result, an entity decides not to sell a long-lived asset (disposal group) previously classified as held for sale, the asset (disposal group) shall be reclassified as held and used. A long-lived asset that is reclassified shall be measured individually at the lower of the following:
- Its carrying amount before the asset (disposal group) was classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the asset (disposal group) been continuously classified as held and used
- Its fair value at the date of the subsequent decision not to sell.
35-45 If an entity removes an individual asset or liability from a disposal group previously classified as held for sale, the remaining assets and liabilities of the disposal group to be sold shall continue to be measured as a group only if the criteria in paragraph 360-10-45-9 are met. Otherwise, the remaining long-lived assets of the group shall be measured individually at the lower of their carrying amounts or fair values less cost to sell at that date.
45-10 If at any time the criteria in [ASC 360-10-45-9] are no longer met (except as permitted by [ASC 360-10-45-11]), a long-lived asset (disposal group) classified as held for sale shall be reclassified as held and used in accordance with paragraph 360-10-35-44.
ASC 205-20
45-1F If at any time the criteria in paragraph 205-20-45-1E are no longer met (except as permitted by paragraph 205-20-45-1G), an entity to be sold that is classified as held for sale shall be reclassified as held and used and measured in accordance with paragraph 360-10-35-44.
If, at any time, the held-for-sale criteria are no longer met, the disposal
group should be reclassified as held and
used and
each long-lived asset should be measured individually, in accordance with ASC
360-10-35-44, at the lower of:
-
“Its carrying amount before the asset (disposal group) was classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the asset (disposal group) been continuously classified as held and used.”
-
“Its fair value at the date of the subsequent decision not to sell.”
The need to measure a long-lived asset individually (as opposed to as a group as may
have been done when the assets were originally classified as held for sale) may
result in an additional impairment on an individual long-lived asset that was
previously included in the broader disposal group if the individual asset’s fair
value is less than its carrying amount adjusted for depreciation.
In addition, as of the date on which the held-for-sale criteria are no longer
met, the statement of financial position and notes to the financial statements
should no longer separately identify the assets and liabilities of the disposal
group as held for sale, and any amounts that had been reported in discontinued
operations should be reclassified to continuing operations for all periods
presented.
In some cases, an entity may decide to retain an asset or liability that it had
previously determined to be part of a disposal group classified as held for sale.
ASC 360-10-35-45 states, in part, that “[i]f an entity removes an individual asset
or liability from a disposal group previously classified as held for sale, the
remaining assets and liabilities of the disposal group to be sold shall continue to
be measured as a group only if the [held-for-sale criteria] are met.” If the
remaining assets are no longer part of a single disposal group but the remaining
assets still qualify as held for sale (e.g., because plans still exist to sell them
individually), in a manner consistent with that premise, the remaining assets would
be measured individually (as opposed to as a disposal group) at the lower of their
carrying amounts or fair values less cost to sell.
Example
3-7
Company C has a wholly owned subsidiary, Subsidiary D. Subsidiary D represents a
component of C. Company C plans to dispose of D in its
entirety and, at the end of the first quarter, C determines
that D meets the criteria to be classified as held for
sale.
In the third quarter, C decides to retain certain fixed assets of D while
continuing to pursue a disposal of D’s remaining net assets
and operations. Company C concludes that the remaining
assets of D to be sold continue to constitute a disposal
group that meets the criteria to be classified as held for
sale and remeasures them (if necessary) at the lower of
carrying value or fair market value less cost to sell. In
accordance with ASC 360-10-45-10, C reclassifies to assets
held and used the fixed assets it no longer seeks to dispose
of and measures those fixed assets individually at the lower
of (1) their carrying amounts before being classified as
held for sale less depreciation expense that would have been
recognized if they had not been classified as held for sale
or (2) the fair value as of the date of the subsequent
decision not to sell.
3.10 Consideration of Subsequent Events in the Assessment of the Held-for-Sale Classification
ASC 360-10
45-13 If the criteria in paragraph 360-10-45-9 are met after the balance sheet date but before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25), a long-lived asset shall continue to be classified as held and used in those financial statements when issued or when available to be issued. In addition, information required by paragraph 205-20-50-1(a) shall be disclosed in the notes to financial statements. If the asset (asset group) is tested for recoverability (on a held-and-used basis) as of the balance sheet date, the estimates of future cash flows used in that test shall consider the likelihood of possible outcomes that existed at the balance sheet date, including the assessment of the likelihood of the future sale of the asset. That assessment made as of the balance sheet date shall not be revised for a decision to sell the asset after the balance sheet date. Because it is difficult to separate the benefit of hindsight when assessing conditions that existed at a prior date, it is important that judgments about those conditions, the need to test an asset for recoverability, and the application of a recoverability test be made and documented together with supporting evidence on a timely basis. An impairment loss, if any, to be recognized shall be measured as the amount by which the carrying amount of the asset (asset group) exceeds its fair value at the balance sheet date.
ASC 360-10-45-13 states that if the held-for-sale criteria “are met after the
balance sheet date but before the financial statements are issued or
are available to be issued” (as discussed in ASC 855-10-25), the
long-lived asset (or disposal group) is “classified as held and used
in those financial statements when issued or when available to be
issued.” This paragraph further indicates that an entity should
disclose the information required by ASC 205-20-50-1(a) in the notes
to financial statements. If a component either meets the
held-for-sale criteria or is disposed of “after the balance sheet
date but before the financial statements are issued or are available
to be issued,” entities should also consider the disclosure
requirements in ASC 855-10-50 related to nonrecognized subsequent
events.
While ASC 205-20 does not include similar guidance, we believe that entities
should apply it to disposal groups that qualify for
discontinued-operations reporting. Similarly, we think that if the
held-for-sale criteria are met before the balance sheet date but are
no longer met when the financial statements are issued or are
available to be issued, the disposal group should still be
classified as held for sale in the financial statements. We also
believe that an entity should consider providing the disclosures in
ASC 205-20-50-3 (see Section 7.7.1) about its
change in plan. See Section 3.9 for guidance
on the accounting in situations in which an entity has a change in
its plan of sale.
Further, ASC 360-10-45-13 goes on to say that “[i]f the asset (asset
group) is tested for recoverability (on a held-and-used basis) as of
the balance sheet date, the estimates of future cash flows used in
that test shall consider the likelihood of possible outcomes that
existed at the balance sheet date, including the assessment of the
likelihood of the future sale of the asset. That assessment made as
of the balance sheet date shall not be revised for a decision to
sell the asset after the balance sheet date” (see Section
2.4.2).
Chapter 4 — Long-Lived Assets to Be Disposed of Other Than by Sale
Chapter 4 — Long-Lived Assets to Be Disposed of Other Than by Sale
4.1 Overview
ASC 360-10
45-15 A long-lived asset to be
disposed of other than by sale (for example, by abandonment,
in an exchange measured based on the recorded amount of the
nonmonetary asset relinquished, or in a distribution to
owners in a spinoff) shall continue to be classified as held
and used until it is disposed of. The guidance on long-lived
assets to be held and used in Sections 360-10-35, 360-10-45,
and 360-10-50 shall apply while the asset is classified as
held and used. If a long-lived asset is to be abandoned or
distributed to owners in a spinoff together with other
assets (and liabilities) as a group and that disposal group
meets the conditions in paragraphs 205-20-45-1A through
45-1C to be reported in discontinued operations, paragraphs
205-20-45-3 through 45-5 shall apply to the disposal group
at the date it is disposed of.
A long-lived asset (or a group of assets) may be disposed of in ways
other than by sale, such as by abandonment, in an exchange measured on the basis of
the recorded amount of the nonmonetary asset relinquished (i.e., a nonmonetary
exchange), or in a distribution to owners in a spin-off. Assets to be disposed of
other than by sale should continue to be classified as held and used until they are
disposed of. Upon disposal, entities must assess whether the disposed-of assets
qualify for discontinued-operations reporting. If not, the entity should apply the
presentation and disclosure requirements in ASC 360-10 (see Chapter 6). If so, the entity
should apply the presentation and disclosure requirements in ASC 205-20 (see
Chapter 7).
Because assets to be disposed of other than by sale are classified
as held and used until they are disposed of, the operations and any incremental
direct costs (e.g., advisory fees or legal fees) that are incurred in connection
with the disposal cannot be reported in discontinued operations until the disposal
group is abandoned or otherwise disposed of even if the disposal would otherwise
qualify for discontinued-operations reporting.
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.
4.3 Nonmonetary Exchange
A nonmonetary exchange is a reciprocal transaction that involves an
exchange of assets (or liabilities) or services with another entity. ASC
360-10-45-15 requires that a long-lived asset or asset group to be disposed of in an
exchange, measured on the basis of the recorded amount of the nonmonetary asset
relinquished, continue to be classified as held and used until it is disposed of. A
nonmonetary exchange that meets any of the below criteria in ASC 845-10-30-3 must be
recognized on the basis of the recorded amount of the nonmonetary asset given
up.
ASC 845-10
30-3 A
nonmonetary exchange shall be measured based on the recorded
amount (after reduction, if appropriate, for an indicated
impairment of value as discussed in paragraph 360-10-40-4)
of the nonmonetary asset(s) relinquished, and not on the
fair values of the exchanged assets, if any of the following
conditions apply:
- The fair value of neither the asset(s) received nor the asset(s) relinquished is determinable within reasonable limits.
- The transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange.
- The transaction lacks commercial substance (see [ASC 845-10-30-4]).
By contrast, if the nonmonetary exchange does not meet any of the
conditions in ASC 845-10-30-3, the exchange is accounted for at fair value. In that
case, we believe that the disposal should be assessed as a sale transaction and the
disposal group should be classified as held for sale when the criteria are met (see
Section 3.3).
A decision to engage in a nonmonetary exchange does not, in and of
itself, indicate that the asset being exchanged is not recoverable. However, an
entity should consider its specific facts and circumstances in determining whether
the exchange represents an indicator of impairment. If so, the asset or assets
should be tested for impairment on a held-and-used basis if they are classified as
held and used or on a held-for-sale basis if the exchange is at fair value and the
held-for-sale classification criteria are met.
4.4 Spin-Offs and Other Nonmonetary Exchanges Recorded at Carrying Amount
ASC 360-10
Long-Lived Assets to Be
Exchanged or to Be Distributed to Owners in a
Spinoff
40-4 For purposes of this Subtopic,
a long-lived asset to be disposed of in an exchange measured
based on the recorded amount of the nonmonetary asset
relinquished or to be distributed to owners in a spinoff is
disposed of when it is exchanged or distributed. If the
asset (asset group) is tested for recoverability while it is
classified as held and used, the estimates of future cash
flows used in that test shall be based on the use of the
asset for its remaining useful life, assuming that the
disposal transaction will not occur. In such a case, an
undiscounted cash flows recoverability test shall apply
prior to the disposal date. In addition to any impairment
losses required to be recognized while the asset is
classified as held and used, an impairment loss, if any,
shall be recognized when the asset is disposed of if the
carrying amount of the asset (disposal group) exceeds its
fair value. The provisions of this Section apply to
nonmonetary exchanges that are not recorded at fair value
under the provisions of Topic 845.
The glossary in ASC 845-10-20 defines a nonreciprocal transfer as “a
transfer of assets or services in one direction, either from an entity to its owners
(whether or not in exchange for their ownership interests) or to another entity, or
from owners or another entity to the entity. An entity’s reacquisition of its
outstanding stock is an example of a nonreciprocal transfer.” By contrast, a
reciprocal exchange involves an exchange of assets (or liabilities) or services with
another entity. One example of a nonreciprocal transfer is a spin-off.
The ASC master glossary defines a spin-off as “[t]he transfer of
assets that constitute a business by an entity (the spinnor) into a new legal
spun-off entity (the spinnee), followed by a distribution of the shares of the
spinnee to its shareholders, without the surrender by the shareholders of any stock
of the spinnor.”
ASC 845-10
Nonreciprocal Transfers
With Owners
30-10 Accounting for the
distribution of nonmonetary assets to owners of an entity in
a spinoff or other form of reorganization or liquidation or
in a plan that is in substance the rescission of a prior
business combination shall be based on the recorded amount
(after reduction, if appropriate, for an indicated
impairment of value) (see paragraph 360-10-40-4) of the
nonmonetary assets distributed. Subtopic 505-60 provides
additional guidance on the distribution of nonmonetary
assets that constitute a business to owners of an entity in
transactions commonly referred to as spinoffs. A pro rata
distribution to owners of an entity of shares of a
subsidiary or other investee entity that has been or is
being consolidated or that has been or is being accounted
for under the equity method is to be considered to be
equivalent to a spinoff. Other nonreciprocal transfers of
nonmonetary assets to owners shall be accounted for at fair
value if the fair value of the nonmonetary asset distributed
is objectively measurable and would be clearly realizable to
the distributing entity in an outright sale at or near the
time of the distribution.
According to ASC 845-10-30-10 above, if a company spins off a
business to its shareholders, the assets transferred are recorded at their carrying
amount (after any necessary impairment adjustments). In addition, similar treatment
would generally be afforded to the pro rata distribution of shares of a legal
entity, regardless of whether the legal entity is being consolidated or accounted
for under the equity method. All other distributions of nonmonetary assets would
typically be non–pro rata and hence would be considered more akin to a
dividend-in-kind, which is generally recorded at the fair value of the assets
transferred.
The assets being distributed to owners in a spin-off (i.e., the
spinnee) must remain classified as held and used until the spin-off occurs. However,
because a plan to dispose of assets before the end of their previously estimated
useful life may be an indicator of impairment, an entity would be expected to
consider whether the long-lived assets of the spinnee are impaired on a
held-and-used basis. Because a spin-off is a nonreciprocal transfer (i.e., no
consideration is received in exchange), ASC 360-10-40-4 provides specific guidance
on testing the recoverability of the spinnee and explains that “the estimates of
future cash flows used in that test shall be based on the use of the asset for its
remaining useful life, assuming that the disposal transaction will not occur.”
Connecting the Dots
ASC 505-60-25-8 addresses whether a spin-off should be
accounted for in accordance with its legal form (a “forward spin”) or as a
“reverse spin” when the substance of the transactions differs from its legal
form. There is a rebuttable presumption that a spin-off should be accounted
for on the basis of its legal form (i.e., the legal spinnor is also the
accounting spinnor). However, ASC 505-60-25-8 provides several indicators
for an entity to consider when deciding whether the presumption to account
for the transaction on the basis of its legal form should be overcome. No
one factor should be considered determinative, so when the indicators are
mixed, the entity will need to use judgment to determine which entity is the
accounting spinnee. See Section 1.2.3
of Deloitte’s Roadmap Carve-Out Financial
Statements for more information.
ASC 360-10-40-4 requires that an impairment loss be recognized if
the carrying amount of the spinnee exceeds its fair value as of the date of the
spin-off. After recognizing any impairment, the spinnor should derecognize the
spinnee’s assets and liabilities on the date of the spin-off at their carrying
amounts in the spinnor’s financial statements.
Bridging the GAAP
Under IFRS 5, a long-lived asset to be distributed to owners
is measured at the lower of its carrying amount or fair value less costs to
distribute in a manner similar to assets held for sale.
Questions have arisen about situations in which a spinnor disposes
of a business in a spin-off before an initial public offering of the spinnor. In
such cases, the spinnor should reflect the disposal as either (1) a disposal to
which discontinued-operations reporting may or may not apply or, in limited
circumstances, (2) a change in the reporting entity. If the disposal is reflected as
a change in the reporting entity, the spinnee’s operations would be removed from the
spinnor’s financial statements as if the spinnor never held the business. SAB Topic
5.Z.7 provides the SEC staff’s views on this topic.
SEC Staff Accounting Bulletins
SAB Topic 5.Z.7,
Accounting for the Spin-Off of a Subsidiary
[Reproduced in ASC 505-60-S99-1]
Facts: A Company
disposes of a business through the distribution of a
subsidiary’s stock to the Company’s shareholders on a pro
rata basis in a transaction that is referred to as a
spin-off.
Question: May the
Company elect to characterize the spin-off transaction as
resulting in a change in the reporting entity and restate
its historical financial statements as if the Company never
had an investment in the subsidiary, in the manner specified
by FASB ASC Topic 250, Accounting Changes and Error
Corrections?
Interpretive
Response: Not ordinarily. If the Company was
required to file periodic reports under the Exchange Act
within one year prior to the spin-off, the staff believes
the Company should reflect the disposition in conformity
with FASB ASC Topic 360. This presentation most fairly and
completely depicts for investors the effects of the previous
and current organization of the Company. However, in limited
circumstances involving the initial registration of a
company under the Exchange Act or Securities Act, the staff
has not objected to financial statements that retroactively
reflect the reorganization of the business as a change in
the reporting entity if the spin-off transaction occurs
prior to effectiveness of the registration statement. This
presentation may be acceptable in an initial registration if
the Company and the subsidiary are in dissimilar businesses,
have been managed and financed historically as if they were
autonomous, have no more than incidental common facilities
and costs, will be operated and financed autonomously after
the spin-off, and will not have material financial
commitments, guarantees, or contingent liabilities to each
other after the spin-off. This exception to the prohibition
against retroactive omission of the subsidiary is intended
for companies that have not distributed widely financial
statements that include the spun-off subsidiary. Also,
dissimilarity contemplates substantially greater differences
in the nature of the businesses than those that would
ordinarily distinguish reportable segments as defined by
FASB ASC paragraph 280-10-50-10 (Segment Reporting
Topic).
All requirements in SAB Topic 5.Z.7 must be met for the spinnor to
reflect the transaction as a change in the reporting entity. Depending on the extent
of judgment an entity needs to use in applying SAB Topic 5.Z.7, as well as the
significance of the judgment applied to the spinnor’s financial statements, an
entity contemplating an initial public offering may consider consulting with the SEC
staff on a prefiling basis.
If the spinnor presents a spin-off as a disposal, it must also
assess whether the spin-off should be presented as a discontinued operation. Because
the spinnee must be classified as held and used until the spin-off occurs, even if
the spinnee is expected to meet the discontinued-operations reporting criteria, the
spinnor cannot present the spinnee’s operations, including the direct costs of the
spin-off, in discontinued operations until the shares are distributed to the
owners.
Example 4-2
Company B, a public company, announced its
intent to spin off one of its segments, Segment H, into a
separate public company. Before its calendar year ending
December 31, 20X8, B filed a Form 10 with the SEC and
received approval from its board of directors and
shareholders to distribute H to its shareholders in a
spin-off. On December 27, 20X8, shares of B were traded as
“ex-dividend.” The record date of distribution was January
2, 20X9, and the distribution date was January 6, 20X9.
Under ASC 360-10-40-4, the asset group that
is to be distributed to owners in a spin-off is disposed of
when it is distributed. Until the shares are distributed to
the shareholders on January 6, 20X9, the asset group should
continue to be classified as held and used and continue to
be reported in continuing operations.
Example 4-3
Entity A will be split into three distinct operating
companies (B, C, and D), each of which meets the definition
of a business in ASC 805-10-20 (see Deloitte’s Roadmap
Business
Combinations). Entity A's shareholders
will receive equal shares of B, C, and D in exchange for
their shares in A.
In the first step, A forms three new operating companies and
contributes the assets of the B, C, and D businesses,
respectively, to each of the newly formed entities. This
transaction represents a transaction between entities under
common control, and A should account for the creation of the
new operating companies at carrying value in accordance with
ASC 805-50-30-5.
In the second step, A distributes to the shareholders a pro
rata interest in the shares of B, C, and D and then is
liquidated, effectively resulting in a pro rata split-up of
A. In accordance with ASC 845-10-30-10, the pro rata
split-up should be based on the recorded amounts of the
nonmonetary assets distributed.
4.5 Other Nonreciprocal Transfers Other Than Spin-Offs
While other nonreciprocal transfers of long-lived assets (e.g.,
split-offs, dividends-in-kind, common-control transfers, or donations) are not
specifically addressed in U.S. GAAP, we believe that such transfers are also
disposals other than by sale, regardless of whether they are measured at historical
cost or fair value in the transferring entity’s books. Thus, we believe that, by
analogy to the guidance in ASC 845-10-30-10, the assets being distributed in a
nonreciprocal exchange should remain classified as held and used until the
distribution occurs.
4.5.1 Common-Control Transactions
As discussed in Appendix B.4.3 of Deloitte’s Roadmap
Business
Combinations, the transferring entity typically accounts
for the transfer of assets in a common-control transaction as a disposition in
accordance with ASC 360-10. We believe that, while not specifically addressed in
the guidance, the net assets to be disposed of in a common-control transaction
should be classified as held and used until they are exchanged or distributed in
the same manner as net assets to be distributed in a spin-off. Therefore, the
net assets to be transferred in a common-control transaction should be
considered disposed of “other than by sale” and should not be classified as held
for sale in the periods before they are exchanged or distributed, even if the
transferring entity will receive consideration as part of the exchange.
ASC 360-10-40-4 requires that a spinnor recognize an impairment
loss on the date on which long-lived assets are distributed in a spin-off if the
carrying amount of the assets (disposal group) exceeds their fair value. While a
common-control transaction is accounted for as a disposal other than by sale in
the same manner as a spin-off transaction, we do not believe that the
transferring entity is required to recognize an impairment loss if the carrying
amount of the assets to be distributed in a common-control transaction exceeds
their fair value. Rather, we believe that the FASB intended for the guidance in
ASC 360-10-40-4 to address the impairment guidance in ASC 845-10-30-10
explicitly referring to a distribution to owners in a spin-off transaction and
that this guidance should not be extended to transfers of assets under common
control of the same parent.
However, ASC 360-10-35-21 requires that an entity test a
long-lived asset (asset group) classified as held and used for impairment
whenever “events or changes in circumstances indicate that its carrying amount
may not be recoverable.” Therefore, the transferring entity should consider
whether the common-control transaction indicates that the long-lived assets
(asset group) to be transferred should be tested for impairment under the
held-and-used model before the disposal date. ASC 360-10-40-4 clarifies that
even if the entity intends to distribute assets in a spin-off transaction, the
assets should be tested for recoverability, if necessary, as if they are held
and used, and the estimates of future cash flows used in the recoverability test
should be based on the use of the assets for their remaining useful life,
provided that the disposal transaction will not occur. We believe that the same
approach should be applied to assets to be distributed in a common-control
transaction if the transferring entity determines that a triggering event has
occurred and that the assets should be tested for recoverability before they are
transferred.
4.5.2 Non–Pro Rata Split-Off of a Segment
Unlike a spin-off, which is a pro rata distribution of subsidiary stock, a
split-off may involve a non–pro rata distribution because some of the parent
shareholders may not participate in the exchange. As indicated in EITF Issue
01-2, “federal income tax law states that a split-off is a transaction in which
a parent company exchanges its stock in a subsidiary for parent company stock
held by its shareholders. For federal income tax purposes, the exchange of
shares need not be pro rata to all shareholders, or even include all
shareholders, in order to be considered a tax-free split-off.”
ASC 845-10
Accounting for
Reorganizations Involving a Non-Pro-Rata Split-Off
of Certain Nonmonetary Assets to
Owners
30-12 A
non-pro-rata split-off of a segment of a business in a
corporate plan of reorganization shall be accounted for
at fair value.
30-13 A
split-off of a targeted business, distributed on a pro
rata basis to the holders of the related targeted stock,
shall be accounted for at historical cost. If the
targeted stock was created in contemplation of the
subsequent split-off, the two steps (creation of the
targeted stock and the split-off) cannot be separated
and shall be viewed as one transaction with the
split-off being accounted for at fair value.
In a non–pro rata split-off of a component of an entity, fair value is determined
on the basis of either the stock received by the parent-entity shareholders or
the parent-entity stock, whichever is more clearly determinable. Thus, any gain
or loss on the distribution will be determined on the basis of the difference
between the carrying amount of the segment and the fair value of either (1) the
stock of the component received by the parent-entity shareholders or (2) the
parent-entity stock reacquired by the parent from the parent-entity
shareholders. The gain or loss should be included in the income statement. If
the split-off results in a full divestiture of the segment (or a component of an
entity) and the divestiture qualifies as a discontinued operation under ASC
205-20, the gain or loss should be reflected in discontinued operations.
Example 4-4
Entity A, a closely held nonpublic company, has four
operating segments. Entity A's shareholders, X, Y, and
Z, each own one-third of the voting common stock. In a
plan of reorganization, A will split off Segment 1 in
exchange for all the voting common stock in A held by X.
Because the distribution by A of Segment 1 to an owner
is not made on a pro rata basis to all shareholders of
record, A will account for the exchange at fair
value.
Chapter 5 — Discontinued Operations
Chapter 5 — Discontinued Operations
5.1 Overview
The reporting of discontinued operations separately from continuing
operations is meant to provide stakeholders with information on assessing the
effects of a disposal on an entity’s ongoing operations. The operations of a
disposal group may only be presented as a discontinued operation once the assets
(and liabilities) meet the criteria to be classified as held for sale, have been
sold, or have been otherwise disposed of (e.g., abandonment) and only if the
disposal represents a strategic shift that has or will have a major effect on an
entity’s operations and financial results. Therefore, not all disposal transactions
qualify for discontinued-operations reporting. If the assets (and liabilities) of
the discontinued operation are classified as held for sale (rather than having been
disposed of), they are measured at the lower of their carrying amount or fair value
less costs to sell like other assets that are classified as held for sale under ASC
360-10.
5.2 Criteria for Reporting a Discontinued Operation
ASC 205-20
What Is a Discontinued
Operation?
45-1A A discontinued operation may
include a component of an entity or a group of components of
an entity, or a business or nonprofit activity.
A Discontinued
Operation Comprising a Component or a Group of
Components of an Entity
45-1B A disposal of a component of
an entity or a group of components of an entity shall be
reported in discontinued operations if the disposal
represents a strategic shift that has (or will have) a major
effect on an entity’s operations and financial results when
any of the following occurs:
-
The component of an entity or group of components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale.
-
The component of an entity or group of components of an entity is disposed of by sale.
-
The component of an entity or group of components of an entity is disposed of other than by sale in accordance with paragraph 360-10-45-15 (for example, by abandonment or in a distribution to owners in a spinoff).
45-1C Examples of a strategic shift
that has (or will have) a major effect on an entity’s
operations and financial results could include a disposal of
a major geographical area, a major line of business, a major
equity method investment, or other major parts of an entity
(see paragraphs 205-20-55-83 through 55-101 for
Examples).
The operations related to a disposal of assets (and liabilities) are
reported in discontinued operations in the statement of operations if all of the
following criteria are met:
-
The disposed-of assets (and liabilities) together represent a component of an entity (or a group of components of an entity) (see the next section).
-
The disposal of the component “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results” (see Section 5.2.2).
In addition, a newly acquired business or nonprofit activity that
meets the held-for-sale classification criteria in ASC 205-20-45-1E upon acquisition
qualifies for reporting in discontinued operations regardless of whether the other
discontinued-operations reporting criteria are met. (See Section 5.6 for further discussion.)
5.2.1 Component of an Entity
The ASC master glossary defines a component of an entity as
follows:
A component of an entity comprises operations
and cash flows that can be clearly distinguished, operationally and for
financial reporting purposes, from the rest of the entity. A component of an
entity may be a reportable segment or an operating segment, a reporting
unit, a subsidiary, or an asset group.
Connecting the Dots
A discontinued operation may represent one or more
components of an entity. For convenience, the term “component” is used
throughout this publication.
The legal form of a component is not relevant, as demonstrated
by the inclusion of a subsidiary or a reporting unit in the definition. However,
we do not believe that a component can be at a lower level than an asset group.
Further, a disposal group represents the assets and liabilities that will be
disposed of together in a single transaction. Because a component does not have
to be disposed of in a single transaction, a component may consist of multiple
disposal groups.
Because the operations and cash flows of the component must be clearly
distinguishable from the rest of the entity, the financial information of the
component must be available. A disposal group can be a component even if the
parent retains certain assets associated with or used by the component to be
disposed of, such as cash, accounts receivable, other working capital, or
specific assets (e.g., IT systems, intellectual property, a manufacturing
facility, or headquarters). Entities must sometimes use judgment in determining
whether a disposal group constitutes a component.
Example 5-1
Sale of a Component to Multiple Buyers
Company C manufactures and markets men’s
shoes and coats. Company C discloses that it operates
two segments under ASC 280-10 and two lines of business
— the Shoe Group and the Coat Group. The operations and
cash flows of the Shoe Group can be clearly
distinguished, operationally and for financial reporting
purposes, from the rest of C. Therefore, the Shoe Group
is a component of the entity. In the fourth quarter of
20X6, C initiates and closes on a transaction to sell
the majority of the Shoe Group’s manufacturing and
distribution operations to Company E. In addition,
management, having the appropriate level of authority,
commits to a formal plan to sell the remaining assets of
the Shoe Group.
ASC 205-20 does not require that a
component be sold in a single transaction. If the Shoe
Group’s remaining assets and liabilities continue to
meet the requirements for held-for-sale classification,
C may continue to classify them as a discontinued
operation. See Section 5.3 for
considerations related to disposals that occur over
multiple reporting periods.
Example 5-2
Sale of an Entire
Entity
The owners of Company A, a manufacturing entity, enter
into an agreement to sell A in its entirety to Company
B. Because the operations being sold represent the
entire entity (and therefore are not distinguishable
from the rest of the entity), A does not meet the
definition of a component of an entity. Therefore, the
operations of A cannot be presented as discontinued
operations.
5.2.2 Strategic Shift That Has (or Will Have) a Major Effect
To report a discontinued operation, the disposal must represent
“a strategic shift that has (or will have) a major effect on an entity’s
operations and financial results.” ASC 205-20 does not define the terms
“strategic shift” and “major effect” but provides the following examples of
dispositions that represent strategic shifts that have (or will have) a major
effect on an entity’s operations:
-
A major geographical area.
-
A major line of business.
-
A major equity method investment.
-
Other major parts of an entity.
In addition, ASC 205-20-55 includes five examples of
dispositions that are strategic shifts that have or will have a major effect on
the entity’s operations and financial results:
-
The sale of a product line that represents 15 percent of the entity’s total revenues.
-
The sale of a geographical area that represents 20 percent of the entity’s total assets.
-
The sale of all the entity’s mall stores (which historically have provided 30 to 40 percent of the entity’s total net income and 15 percent of its current total net income) so that the entity can focus solely on its supercenter stores.
-
The sale of a component that is an equity method investment that represents 20 percent of the entity’s total assets.
-
The sale of an 80 percent interest in one of two product lines that accounts for 40 percent of total revenue.
The examples indicate that the assessment of whether a disposal
should be reported as a discontinued operation is both qualitative and
quantitative. A strategic shift implies that the disposal must result from a
change in the way management had intended to run the business. For example, if
management has a history of closing retail locations that operate at a loss, the
decision to close a number of stores operating at a loss in a given period might
have a major effect on an entity’s operations and financial results but would
not represent a strategic shift. The determination of whether a disposal
represents a strategic shift will be based on the entity’s specific facts and
circumstances.
Likewise, ASC 205-20 offers no bright lines regarding whether
the disposal has or will have a “major” effect on an entity’s operations and
financial results. However, the examples from ASC 205-20-55 indicate that a
disposal would have a major effect if it represents (1) 15 percent of the
entity’s total revenues, (2) 20 percent of the entity’s total assets, or (3) 15
percent of the entity’s total net income. Thus, we believe that “major” is a
quantitatively high threshold, especially when considered alongside the
disclosure requirements added to ASC 360-10 related to disposals of individually
significant components that do not qualify for discontinued operations (see
Chapter 6).
According to the examples, the disposal only has to have a major effect on one
metric (i.e., revenue, net income, or assets), not necessarily all three.
In addition, ASC 205-20 does not state which metrics must be
considered. ASC 205-20 does not preclude consideration of the impact on other
metrics such as operating cash flows or EBITDA if they are relevant to investors
and have been used by management to communicate operating and financial results.
We do not believe that the assessment should be based on whether a sale results
in a significant one-time gain or loss to the entity but on whether eliminating
the operations and assets of the component will have a major effect on an
entity’s ongoing operations and financial results. Similarly, an entity may need
to use judgment in evaluating metrics when those metrics include the effects of
events considered to be nonrecurring, such as impairments.
In prepared remarks at the 2015 AICPA Conference on
Current SEC and PCAOB Developments, Barry Kanczuker, an associate chief
accountant in the SEC’s Office of the Chief Accountant, provided the following
insights regarding the staff’s views on strategic shift and major effect:
So how does one determine what represents a strategic shift
that has or will have a major effect? I would observe that the standard
requires judgment to determine whether a disposal meets the revised
definition for a discontinued operation. ASC 205-20 provides several
examples of what may constitute a strategic shift that will have a major
effect on operations and financial results. The examples include a sale of a
product line that represents 15% of total revenue; the sale of a geographic
area that represents 20% of total assets; and the sale of all stores in one
of two types of store formats that historically provided 30–40% of net
income and 15% of current net income. We have heard suggestions that the
quantitative factors included in the examples are meant to create thresholds
by which to determine whether a disposal represents a strategic shift that
has a major effect on the entity’s operations and financial results. In my
view, the thresholds are illustrative and do not establish bright lines or
safe harbors.
A question also arises as to what
constitutes a financial result? I believe that judgment is required
to determine which financial results are indicative of a strategic shift
that has a major effect. I think there are certain “primary” metrics that
are prominently presented in the financial statements and communicated to
investors. For example, revenue, total assets and net income are items that
I would clearly consider to be relevant metrics. However, the identification
of other financial results may require judgment, with an eye toward what is
relevant from an investor’s perspective. It also may be helpful to
understand alternative measures, as certain operating metrics may also be
relevant, particularly where the Company has used the measure on a
consistent basis for communicating operating and financial results. I also
believe that it is prudent to consider the effect of the relevant financial
metric on the entity from the perspective of current, historical and
forecasted results. In my view, the guidance indicates a need to evaluate
the totality of the evidence, and there is no single financial metric that
is determinative in concluding that a disposal had a major effect on the
entity’s operations and financial results.
While
the guidance does not provide quantitative bright lines in determining
whether a disposal is a strategic shift that has a major effect, the less
significant a financial impact the disposal has on an entity, the stronger
the qualitative evidence would need to be. In evaluating whether the
qualitative evidence supports a strategic shift that has a major effect, I
think it is important to consider the prominence and consistency with which
the disposed component and related qualitative factors have been discussed
within periodic filings.
We believe that disposal of a reportable segment will often
qualify for presentation as a discontinued operation, while an entity will need
to use judgment when the disposal consists of an operating segment, reporting
unit, or other parts of the entity. An entity will also want to consider the
extent to which information about the component has been provided publicly
(e.g., via the entity’s Web site, earnings releases, or MD&A) in assessing
whether a disposal represents a strategic shift. Further, we believe that an
entity should separately evaluate the criteria for reporting discontinued
operations at each level of financial statement reporting and that the
conclusions reached at the level of the stand-alone subsidiary may differ from
those reached at the level of the consolidated parent.
The examples of a strategic shift that has (or will have) a
major effect on an entity’s operations include the disposal of “other major
parts of an entity,” not just a major line of business or geographical region.
In the 2013 proposal on which ASU 2014-08 was based, the FASB
contemplated limiting the definition of a discontinued operation to a separate
major line of business or a major geographical area of operations. Paragraphs
BC13 and BC14 of ASU 2014-08 offer some insight into why the Board ultimately
decided not to limit the definition:
BC13 Some
respondents questioned whether disposals that include several different
parts of an entity other than an entire major line of business or major
geographical area of operations would qualify for discontinued operations
reporting if they represent a strategic shift. Some of those respondents
noted that in their experience it is rare that an entity ever disposes of an
entire major line of business or a major geographical area of operations.
Additionally, those respondents noted that a disposal transaction that
includes several different parts of an entity often could have a greater
effect on an entity’s operations and financial results than a disposal of an
entire major line of business or major geographical area of
operations.
BC14 The Board concluded that
the nature of the disposal and its effect on an entity’s operations and
financial results matter more than the composition of the transaction.
Therefore, the Board decided that a discontinued operation could include
different parts of an entity other than an entire major line of business or
a major geographical area of operations as long as those parts are a
disposal group that together represents a strategic shift that has a major
effect on an entity’s operations and financial results.
The following examples in ASC 205-20-55 illustrate disposals
that would qualify for discontinued-operations presentation:
ASC 205-20
Example 1:
Consumer Products Manufacturer
55-84 An entity manufactures
and sells consumer products that are grouped into five
major product lines. Each product line includes several
brands that comprise operations and cash flows that can
be clearly distinguished, operationally and for
financial reporting purposes, from the rest of the
entity. Therefore, for that entity, each major product
line includes a group of components of the entity.
55-85 The entity has
experienced high growth in its discount cleaning product
line that has lower price points than its premium
cleaning product line. Total revenues from the discount
cleaning product line are 15 percent of the entity’s
total revenues; however, the discount cleaning product
line will require significant future investments to
increase its profits. Therefore, the entity decides to
shift its strategy of selling cleaning products at
multiple price points and focus solely on selling
cleaning products at a premium price point. As a result,
the entity decides to sell the discount cleaning product
line.
55-86 Because the entity shifts
its strategy of offering discount cleaning products to
consumers and because the discount cleaning product line
is one of five major product lines that is a major part
of the entity’s operations and financial results, the
disposal represents a strategic shift that is reported
in discontinued operations.
Example 2:
Processed and Packaged Goods
Manufacturer
55-87 An entity manufactures
and sells food products that are grouped into five major
geographical areas (Europe, Asia, Africa, the Americas,
and Oceania). Each major geographical area includes
several brands that comprise operations and cash flows
that can be clearly distinguished, operationally and for
financial reporting purposes, from the rest of the
entity. Therefore, for that entity, each major
geographical area includes a group of components of the
entity.
55-88 The entity has
experienced slower growth in its operations located in
the Americas, which accounts for 20 percent of the
entity’s total assets. Therefore, the entity decides to
shift its strategy of selling food products in that
geographical area and focus its resources on
manufacturing and marketing food products in its other
four higher growth geographical areas. As a result, the
entity decides to sell its operations in the
Americas.
55-89 Because the entity’s
operations in the Americas is one of five major
geographical areas that is a major part of the entity’s
operations and financial results, the disposal
represents a strategic shift that is reported in
discontinued operations.
Example 3:
General Merchandise Retailer
55-90 An entity that is a
general merchandise retailer operates 1,000 retail
stores in 2 different store formats — malls and
supercenter stores — throughout the United States. The
entity divides its stores into five major geographical
regions: the Northwest, Southwest, Midwest, Northeast,
and Southeast. For that entity, each retail store
comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting
purposes, from the rest of the entity. Therefore, for
that entity, each retail store is a component of the
entity.
55-91 The entity has
experienced declining net income at its 200 stores
located in malls across all 5 major geographical
regions. Historically, net income from the 200 stores in
malls has been in a range of 30 to 40 percent of the
entity’s total net income. Total net income from the 200
stores in malls is down to 15 percent of the entity’s
total net income because of declining customer traffic
in malls. Therefore, the entity decides to shift its
strategy of selling products in malls and sell the 200
stores located in malls.
55-92 Because the entity
decides to shift its strategy of selling products in
malls and focus solely on its supercenter stores and
because the 200 stores located in malls are a major part
of the entity’s operations and financial results, the
disposal represents a strategic shift that is reported
in discontinued operations.
Example 4: Oil
and Gas Entity
55-93 This Example provides an
illustration of the guidance in paragraphs 205-20-45-1B
through 45-1C. In this Example, the entity disposes of a
component of an entity that is an equity method
investment representing a strategic shift that has a
major effect on the entity’s operations and financial
results and is reported in discontinued operations.
55-94 An entity that follows
the successful-efforts method of accounting produces oil
and gas in two major geographical areas (Europe and
Africa) that are each divided into several regions. Each
region comprises operations and cash flows that can be
clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity.
Therefore, for that entity, each major geographical area
includes a group of components of the entity.
55-95 In its operations located
in Africa, the entity operates through a joint venture
with another entity that is accounted for by the
reporting entity as an equity method investment. The
entity’s carrying amount of its investment in the joint
venture is 20 percent of the entity’s total assets.
Because of significant investments needed in its
operations in Europe, the entity decides to shift its
strategy of operating in Africa to focus on its
operations in Europe and sell its stake in the joint
venture.
55-96 Because the entity shifts
its strategy of operating a joint venture to focus on
its operations in Europe where it maintains full control
and because its operations in Africa are a major part of
the entity’s operations and financial results, its
disposal represents a strategic shift that is reported
in discontinued operations.
5.3 Disposals That Occur Over Multiple Reporting Periods
A component of an entity may be as low a level as an asset group (see
Section 2.3). However, to qualify for
discontinued-operations presentation, the disposal must have a major effect, which
must be quantitatively significant. Sometimes management plans to dispose of a group
of components but those components will qualify as held for sale or will be disposed
of over multiple reporting periods. In such cases, the disposal may represent a
strategic shift in its entirety but the component or components that are disposed of
or classified as held for sale in any individual reporting period may not have a
quantitatively major effect.
We believe that, in such instances, entities may assess, at the time the plan is
formalized, whether the overall plan represents a strategic shift that has or will
have a major effect on an entity’s operations and financial results, provided that
the plan will be executed within a reasonable amount of time. However, we also think
that before reporting any component in discontinued operations, it is appropriate
for entities to wait until the components that are classified as held for sale or
that have been disposed of, in aggregate, have a major effect. Then, the results of
any components that were classified as held for sale or disposed of in prior periods
in accordance with the plan should be reclassified to discontinued operations. We do
not believe that the remaining components should be presented in discontinued
operations until they are classified as held for sale or otherwise disposed of, even
if they are part of the overall plan. Entities should also provide appropriate
disclosures describing the plan.
5.4 Normally Occurring Disposals
Entities in certain industries (e.g., real estate, private equity, or retail)
may frequently enter into disposal transactions that may be quantitatively major. If
the dispositions are part of the entity’s ongoing strategy, it is likely that they
would not represent a strategic shift for the entity. The determination of whether a
normally occurring disposal is a strategic shift will be based on the entity’s
specific facts and circumstances.
Example 5-3
Normally Occurring Disposals
Entity A is a real estate investment trust (REIT) that acquires properties in
areas experiencing a downturn in prices. Entity A renovates
the properties, leases them, and manages them until it is
able to capitalize on appreciation by selling them.
In the current reporting period, A sells a property, identifying the property
sold on the basis of its assessment of whether the sale
would provide it with a specified rate of return. Regardless
of whether the sale has or will have a major effect on A’s
operations and financial results (e.g., reduced rental
income and maintenance costs), the sale would most likely
not represent a strategic shift because it occurred as part
of A’s ongoing strategy to sell the properties that have
appreciated sufficiently to provide A with its specified
rate of return.
If, however, the property sold represented A’s only such
property of a particular class or in a particular
jurisdiction, the sale might represent a strategic shift if
A plans to exit entirely that class of property or
jurisdiction.
5.5 Continuing Involvement
While ASC 205-20 does not preclude discontinued-operations reporting if the
entity has continuing involvement with the
disposed-of component, we believe that entities
should consider the nature, time frame, and extent
of any continuing involvement in determining
whether there has been a strategic shift that has
(or will have) a major effect on their operations
and financial results. Continuing involvement may
be indicated by, for example, (1) supply chain and
distribution agreements, (2) financial guarantees,
(3) options to repurchase assets that were
disposed of, and (4) retained equity method
investments (but generally not retained cost
method investments).
ASC 205-20-50-4A and 50-4B require entities to disclose the nature of any
significant continuing involvement with a discontinued operation after the disposal
date. See Section 7.7.3 for
more information about those disclosure requirements.
ASC 205-20-55-97 through 55-101 contain the following example of a disposal transaction in which the
entity retains a significant investment in the discontinued operation:
ASC 205-20
Example 5: Sports Equipment Manufacturer
55-97 This Example provides an illustration of the guidance in paragraphs 205-20-45-1B through 45-1C. In this
Example, the entity sells 80 percent of a group of components of an entity representing a strategic shift that
has a major effect on the entity’s operations and financial results and is reported in discontinued operations.
55-98 An entity that manufactures and sells sports equipment has two product lines that serve the football
and baseball markets. Each product line includes several different brands that each comprise operations and
cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of
the entity. Therefore, for that entity, each product line includes a group of components of the entity.
55-99 The entity decides to shift its strategy of trying to sell products to the baseball equipment market, which
accounts for 40 percent of its revenues, and focus more on serving its customers in the football equipment
market. However, the entity decides to retain some exposure to the baseball equipment market by selling only
80 percent of the group of components in its product line that serves the baseball market to another entity.
55-100 Because the entity decides to shift its strategy of trying to sell products to the baseball equipment
market by selling 80 percent of the group of components of the entity in that product line and because the
portion sold comprises a major part of the entity’s operations and financial results, its disposal represents a
strategic shift that is reported in discontinued operations.
55-101 Because of the entity’s significant continuing involvement after the disposal date, the entity provides
the disclosures required by paragraphs 205-20-50-4A through 50-4B.
5.6 A Business or Nonprofit Activity Classified as Held for Sale Upon Acquisition
ASC 205-20
A Discontinued Operation Comprising a Business or Nonprofit Activity
45-1D A business or nonprofit
activity that, on acquisition, meets the criteria in
paragraph 205-20-45-1E to be classified as held for sale is
a discontinued operation. If the one-year requirement in
paragraph 205-20-45-1E(d) is met (except as permitted by
paragraph 205-20-45-1G), a business or nonprofit activity
shall be classified as held for sale as a discontinued
operation at the acquisition date if the other criteria in
paragraph 205-20-45-1E are probable of being met within a
short period following the acquisition (usually within three
months).
Pending Content (Transition Guidance: ASC
805-60-65-1)
45-1D A business or nonprofit activity
that, on acquisition or upon formation of a joint
venture, meets the criteria in paragraph
205-20-45-1E to be classified as held for sale is
a discontinued operation. If the one-year
requirement in paragraph 205-20-45-1E(d) is met
(except as permitted by paragraph 205-20-45-1G), a
business or nonprofit activity shall be classified
as held for sale as a discontinued operation at
the acquisition date or the formation date if the
other criteria in paragraph 205-20-45-1E are
probable of being met within a short period
following the acquisition date or the formation
date (usually within three months).
Changing Lanes
In August 2023, the FASB issued ASU 2023-05, under which an entity that
qualifies as either a joint venture or a corporate joint venture (as defined in
the ASC master glossary), is required to apply a new basis of accounting
upon the formation of the joint venture. The ASU’s amendments “are effective
prospectively for all joint venture formations with a formation date on or
after January 1, 2025.” Early adoption is permitted.
Specifically, the ASU amends ASC 205-10-05-3(b), and makes
related amendments to ASC 205-20, to indicate that a “business or nonprofit
activity that, on acquisition or upon formation of a joint venture, is
classified as held for sale” by the newly formed joint venture, would be
reported as a discontinued operation. For more information about ASU
2023-05, see Deloitte’s September 8, 2023, Heads Up.
A business or nonprofit activity that meets the held-for-sale classification
criteria on acquisition
(see
Section 3.5.5)
is reported as a discontinued operation regardless of
whether its disposal will represent a strategic shift or have a major effect on the
entity’s operations or financial results. The FASB’s rationale was that if an entity
classifies a business as held for sale at the time of acquisition, the business was
never considered part of an entity’s continuing operations and should therefore be
reported in discontinued operations.
See
Section 7.10 for a
description of the related disclosure requirements, which are more limited than
those for other types of disposals.
5.7 Consideration of Subsequent Events in the Assessment of Discontinued-Operations Presentation
ASU 2014-08 (codified in ASC 205-20) deleted the previous guidance, under which
the evaluation of whether a disposal qualified for
discontinued-operations presentation took into account events that
occurred after the balance sheet date but before the financial
statements were issued or were available to be issued. This previous
guidance was inconsistent with the guidance in ASC 360-10-45-13,
which indicates that the evaluation of whether a component meets the
held-for-sale criteria is performed as of the balance sheet date
(see Section
3.10). Therefore, entities should determine
whether the held-for-sale criteria and the discontinued-operations
reporting criteria are met as of the balance sheet date. Those
determinations are not affected by events that occur after the
balance sheet date but before the financial statements are issued or
are available to be issued.
Under ASC 205-20-50-3, in the period in which an entity changes its plan for
selling a discontinued operation, the entity must disclose in the
notes to the financial statements “a description of the facts and
circumstances leading to the decision to change that plan and the
change’s effect on the results of operations for the period and any
prior periods presented.” We believe that if the entity decides not
to sell a component after the balance sheet date but before the
financial statements are issued or are available to be issued, the
entity should consider providing the disclosures required by ASC
205-20-50-3 (see Section 7.7.1) about its change in plan.
Chapter 6 — Presentation and Disclosure Requirements for Disposals That Are Not Reported as Discontinued Operations
Chapter 6 — Presentation and Disclosure Requirements for Disposals That Are Not Reported as Discontinued Operations
6.1 Overview
For disposal groups that are classified as held for sale but that do
not meet the criteria for discontinued-operations reporting, an entity must
separately present the assets and liabilities of the disposal group on the face of
the balance sheet only in the initial period in which they are classified as held
for sale. The presentation and disclosure requirements for a disposal group that is
classified as held for sale, or that has been disposed of but does not qualify for
discontinued-operations reporting, differ depending on whether the disposal is an
individually significant component of an entity. Because the term “individually
significant” is not defined, entities will need to apply judgment in interpreting
this term.
6.2 Balance Sheet Presentation for Assets (Disposal Groups) Classified as Held for Sale That Are Not Discontinued Operations
ASC 360-10
Presentation of
Long-Lived Assets or Disposal Group Classified as
Held for Sale
45-14
A long-lived asset classified as held for sale (but not
qualifying for presentation as a discontinued operation in
the statement of financial position in accordance with
paragraph 205-20-45-10) shall be presented separately in the
statement of financial position of the current period. The
assets and liabilities of a disposal group classified as
held for sale shall be presented separately in the asset and
liability sections, respectively, of the statement of
financial position. Those assets and liabilities shall not
be offset and presented as a single amount. The major
classes of assets and liabilities classified as held for
sale shall be separately presented on the face of the
statement of financial position or disclosed in the notes to
financial statements (see paragraph 360-10-50-3(e)).
For disposal groups that are classified as held for sale but that do not meet
the criteria for discontinued-operations reporting, ASC 360-10-45-14 requires that
the assets and liabilities of the disposal group be separately presented on the face
of the balance sheet only in the initial period in which it
is classified as held for sale. As a result, if a disposal group is sold in the same
period in which it is classified as held for sale, the assets and liabilities would
not be separately presented in the balance sheet. We believe that, while not
specifically addressed in ASC 360, in such circumstances, an entity should not
reclassify prior-period balance sheets. Such disposal groups are distinguishable
from those that do qualify for discontinued-operations reporting, since an entity
would be required to reclassify the prior period for the latter. However, in the
absence of specific guidance, we understand that diversity in practice may
exist.
In the period in which long-lived assets or disposal groups that do not qualify
as discontinued operations are classified as held for sale, their major classes of
assets and liabilities must be either (1) presented on the face of the balance sheet
in accordance with ASC 360-10-45-14 or (2) disclosed in the notes in accordance with
ASC 360-10-50-3(e).
ASC 360-10 does not address whether entities should separately present the
assets and liabilities of a disposal group classified as held for sale as current
and noncurrent. Accordingly, we believe that it is acceptable to present these
assets and liabilities as current in the current-period balance sheet if it is
probable that the sale will occur, consideration will be collected within one year,
and the proceeds are not expected to be used to settle long-term debt (in accordance
with ASC 210-10-45-4).
6.3 Income Statement Presentation for Disposals That Are Not Discontinued Operations
ASC 360-10
45-5 A gain or
loss recognized (see Subtopic 610-20 on the sale or transfer
of a nonfinancial asset) on the sale of a long-lived asset
(disposal group) that is not a discontinued operation shall
be included in income from continuing operations before
income taxes in the income statement of a business entity.
If a subtotal such as income from operations is presented,
it shall include the amounts of those gains or losses.
As noted above, ASC 360-10-45-5 requires that entities present gains or losses
recognized from a sale of a long-lived asset (disposal group) that does not qualify
as a discontinued operation “in income from continuing operations before income
taxes in the income statement.” If a subtotal, such as income from operations or
operating income is presented, it should include such gains or losses.
Diversity in practice has been observed with regard to the presentation of gains
or losses from the sale of disposal groups that meet the definition of a business in
ASC 805-10; entities present the gain or loss within nonoperating income. Entities
should carefully consider their specific facts and circumstances in deciding whether
presentation in nonoperating income is appropriate and should ensure that the
presentation is applied consistently.
See Deloitte’s Roadmap Business Combinations for more
information about determining whether a disposal group meets the definition of a
business.
6.3.1 Income Statement Presentation for Real Estate Investment Trusts
As part of its disclosure update and simplification technical release (DUSTR),
the SEC issued a final rule in August 2018. The final rule deleted SEC
Regulation S-X, Rule 3-15(a)(1), which prescribed guidance on the presentation
of gains and losses related to the sale of properties by REITs, since Rule
3-15(a)(1) conflicted with U.S. GAAP. As a result, REITs now must comply with
the requirements of ASC 360-10-45-5 after November 5, 2018 (i.e., the effective
date of DUSTR). While entities are not required by U.S. GAAP or SEC regulations
to present income from continuing operations before income taxes or a similar
subtotal such as operating income, if a REIT does present such a subtotal, it
should include gains or losses on the sale of properties that do not qualify as
discontinued operations.
6.4 Disclosures for Disposals That Are Not Discontinued Operations
ASC 360-10-50-3 requires the following
disclosures for disposals that do not meet the criteria for discontinued-operations
reporting only in the period in which the component is classified as held for sale
or disposed of:
ASC 360-10
50-3 For any period in which a long-lived asset (disposal group) either has been disposed of or is classified as held for sale (see paragraph 360-10-45-9), an entity shall disclose all of the following in the notes to financial statements:
- A description of the facts and circumstances leading to the disposal or the expected disposal.
- The expected manner and timing of that disposal.
- The gain or loss recognized in accordance with paragraphs 360-10-35-37 through 35-45 and 360-10-40-5.
- If not separately presented on the face of the statement where net income is reported (or in the statement of activities for a not-for-profit entity), the caption in the statement where net income is reported (or in the statement of activities for a not-for-profit entity) that includes that gain or loss.
- If not separately presented on the face of the statement of financial position, the carrying amount(s) of the major classes of assets and liabilities included as part of a disposal group classified as held for sale. Any loss recognized on the disposal group classified as held for sale in accordance with paragraphs 360-10-35-37 through 35-45 and 360-10-40-5 shall not be allocated to the major classes of assets and liabilities of the disposal group.
- If applicable, the segment in which the long-lived asset (disposal group) is reported under Topic 280 on segment reporting.
Disclosure requirements other than those in ASC
360-10-50-3 and 50-3A primarily inform financial
statement users about an entity’s ongoing assets.
While the extent of certain disclosures may vary
on the basis of the facts and circumstances, we
believe that disclosures required for assets held
and used by an entity, which are mandated under
other Codification topics (e.g., ASC 310 on
accounts receivable, ASC 350 on goodwill and other
intangible assets, ASC 842 on leases) are
generally not required for a disposal group under
ASC 360-10. This is because the reporting
requirements outside ASC 360-10 are intended to
provide financial statement users with the
information they need to assess an entity's
ongoing operations; therefore, similar disclosures
for disposal groups would not be as meaningful.
However, certain disclosures under ASC 275 (e.g.,
those pertaining to risks and uncertainties
associated with the use of estimates) may also be
appropriate for disposal groups.
6.5 Disclosures for Individually Significant Assets (Disposal Groups) That Are Not Discontinued Operations
Entities must disclose information about pretax profit or loss if a long-lived
asset (disposal group) includes an individually significant component that either
has been disposed of or is classified as held for sale and does not qualify for
discontinued-operations reporting. If an individually significant component includes
a noncontrolling interest, the pretax profit or loss attributable to the parent must
also be disclosed.
The term “individually significant” is not defined. For instance, it is unclear
how an entity should determine whether a disposal is major,
individually significant, or not significant. As with their
assessment of “strategic shift” and “major,” entities will need to
use judgment and should consider both quantitative and qualitative
factors related to the effect of the disposal on their balance
sheets, income statements, and statements of cash flows. Entities
should also recognize that the distinction between disposing of a
component that is “individually significant” and one that represents
a “strategic shift” that has a “major impact” on financial results
is likely to be subtle. Accordingly, such assessments may need to be
made in concert with, rather than independent of, one another.
Therefore, entities should also consider the judgments involved in
the assessment of the requirements for classifying discontinued
operations for individually significant disposal groups.
ASC 360-10
50-3A In addition to the
disclosures in paragraph 360-10-50-3, if a
long-lived asset (disposal group) includes an
individually significant component of an entity
that either has been disposed of or is classified
as held for sale (see paragraph 360-10-45-9) and
does not qualify for presentation and disclosure
as a discontinued operation (see Subtopic 205-20
on discontinued operations), a public business
entity and a not-for-profit entity that has
issued, or is a conduit bond obligor for,
securities that are traded, listed, or quoted on
an exchange or an over-the-counter market shall
disclose the information in (a). All other
entities shall disclose the information in (b).
-
For a public business entity and a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, both of the following:
-
The pretax profit or loss (or change in net assets for a not-for-profit entity) of the individually significant component of an entity for the period in which it is disposed of or is classified as held for sale and for all prior periods that are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity) calculated in accordance with paragraphs 205-20-45-6 through 45-9.
-
If the individually significant component of an entity includes a noncontrolling interest, the pretax profit or loss (or change in net assets for a not-for-profit entity) attributable to the parent for the period in which it is disposed of or is classified as held for sale and for all prior periods that are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity).
-
-
For all other entities, both of the following:
-
The pretax profit or loss (or change in net assets for a not-for-profit entity) of the individually significant component of an entity for the period in which it is disposed of or is classified as held for sale calculated in accordance with paragraphs 205-20-45-6 through 45-9.
-
If the individually significant component of an entity includes a noncontrolling interest, the pretax profit or loss (or change in net assets for a not-for-profit entity) attributable to the parent for the period in which it is disposed of or is classified as held for sale.
-
6.6 Interim Disclosures
Entities that issue interim financial data, such as SEC registrants, should consider
the disclosure requirement in ASC 270. Specifically, ASC 270-10-45-11A states:
Effects of disposals of a component of an entity and unusual or infrequently
occurring transactions and events that are material with respect to the
operating results of the interim period shall be reported separately. Gains
or losses from disposal of a component of an entity and unusual or
infrequently occurring items shall not be prorated over the balance of the
fiscal year.
In addition, ASC 270-10-50-2 states, in part:
If interim financial data and disclosures are not separately reported for the
fourth quarter, users of the interim financial information often make
inferences about that quarter by subtracting data based on the third quarter
interim report from the annual results. In the absence of a separate fourth
quarter report or disclosure of the results (as outlined in the preceding
paragraph) for that quarter in the annual report, disposals of components of
an entity and unusual or infrequently occurring items recognized in the
fourth quarter, as well as the aggregate effect of year-end adjustments that
are material to the results of that quarter (see paragraphs 270-10-05-2 and
270-10-45-10) shall be disclosed in the annual report in a note to the
annual financial statements.
6.7 Flowchart Illustrating the Required Disclosures for Assets (Disposal Groups) That Are Not Discontinued Operations
ASC 360-10
55-18A The following flowchart provides an overview of the disclosures required for disposals of long-lived assets and individually significant components of an entity that do not qualify for presentation and disclosure as a discontinued operation (see Subtopic 205-20 on discontinued operations).
Chapter 7 — Presentation and Disclosure Requirements for Disposals That Are Reported as Discontinued Operations
Chapter 7 — Presentation and Disclosure Requirements for Disposals That Are Reported as Discontinued Operations
7.1 Overview
If the criteria for discontinued-operations reporting are met, the
results of operations of the component that is classified as held for sale or that
has been sold or otherwise disposed of, including any gain or loss recognized,
should be reclassified to discontinued operations in the statement of operations,
retrospectively, for all periods presented. In addition, the assets and liabilities
of the disposal group must be presented separately on the face of the balance sheet
both in the current period (if held for sale) and in prior periods.
7.2 Balance Sheet Presentation of Discontinued Operations
ASC 205-20
45-10 In the period(s) that a
discontinued operation is classified as held for
sale and for all prior periods presented, the
assets and liabilities of the discontinued
operation shall be presented separately in the
asset and liability sections, respectively, of the
statement of financial position. Those assets and
liabilities shall not be offset and presented as a
single amount. If a discontinued operation is part
of a disposal group that includes other assets and
liabilities that are not part of the discontinued
operation, an entity may present the assets and
liabilities of the disposal group separately in
the asset and liability sections, respectively, of
the statement of financial position. If a
discontinued operation is disposed of before
meeting the criteria in paragraph 205-20-45-1E to
be classified as held for sale, an entity shall
present the assets and liabilities of the
discontinued operation separately in the asset and
liability sections, respectively, of the statement
of financial position for the periods presented in
the statement of financial position before the
period that includes the disposal. When an entity
separately presents in prior periods the assets
and liabilities of a discontinued operation, the
entity shall not apply the guidance in paragraph
360-10-35-43 as if those assets and liabilities
were held for sale in those prior periods.
Under ASC 205-20-45-10, in the period in which a component meets the
held-for-sale and discontinued-operations
criteria, an entity must present the assets and
liabilities of the discontinued operation
separately in the asset and liability sections of
the balance sheet. Assets and liabilities cannot
be offset and presented as a single amount. ASC
205-20-45-10 also requires that an entity
reclassify not only the current-period balance
sheet but also any comparative balance sheets
presented. For example, a discontinued operation
that is classified as held for sale and sold in
the same reporting period would be presented as
held for sale in prior-period balance sheets (but
not in the current-period balance sheet).
Similarly, the assets and liabilities of a
discontinued operation that is abandoned in the
current period would be reclassified in the
prior-period balance sheet. “Held for sale” or
“held for disposition” presentation in the prior
periods is appropriate even if the discontinued
operation did not meet the criteria to be
classified as held for sale (or was not yet
disposed of other than by sale) in those prior
periods. Similar presentation in the prior periods
would also be appropriate for the assets and
liabilities to be transferred in a spin-off
transaction, but such presentation would not be
reflected until after the spin-off actually
occurs (see Section
4.4).
ASC 205-20 does not address whether entities should separately present the
assets and liabilities of a discontinued operation
as current and noncurrent. We believe that it is
appropriate to do so and that four balance sheet
captions may result from such presentation (e.g.,
“current assets held for sale,” “noncurrent assets
held for sale,” “current liabilities held for
sale,” and “noncurrent liabilities held for
sale”). In addition, we believe that it is
acceptable for an entity to present all of the
assets and liabilities of a discontinued operation
classified as held for sale as current in the
current-period balance sheet if it is probable
that the sale will occur, proceeds will be
collected within one year, and the proceeds are
not expected to be used to settle long-term debt.
See Section 13.3.3.5
of Deloitte’s Roadmap Issuer’s Accounting for
Debt for more information about
financial statement presentation related to
disposals in which proceeds will be used to settle
long-term debt. We think that the current and
noncurrent classifications of a discontinued
operation’s assets and liabilities should not
change in prior periods because the noncurrent
assets and liabilities did not meet the criteria
for presentation as current in those prior
periods.
In the period in which a component meets the criteria for presentation in
discontinued operations, the entity must provide detailed information about the
assets and liabilities of the discontinued operation. Therefore, the major classes
of the discontinued operation’s assets and liabilities must be either (1) presented
on the face of the balance sheet in accordance with ASC 205-20-45-11 or (2)
disclosed in the notes in accordance with ASC 205-20-50-5B(e) (see Section 7.8.1).
Such presentation or disclosure must be provided for the discontinued operation in the current
period and all prior periods presented. If the major classes of assets and liabilities of a discontinued
operation are disclosed in the notes, the disclosure must be reconciled to the amounts presented
on the balance sheet, and if the disposal group includes assets or liabilities that are not part of the
discontinued operation, the reconciliation should show them separately from the assets and liabilities of
the discontinued operation. Entities will need to apply judgment in determining what constitutes “major”
with respect to such presentation or disclosure, since ASC 205-20 does not provide guidance on this
topic.
SEC registrants
should also evaluate the reporting considerations discussed in Chapter 8.
Example 7-1
Illustrative Balance Sheet Presentation of a Discontinued Operation
Below is an example of a simplified comparative balance sheet presentation for a component that meets the
criteria to be presented as a discontinued operation in the current period.
See Example 7-7 for an
illustration of the disclosure in the notes to financial statements (see ASC
205-20-50-5B(e)) of the discontinued operation’s major classes of assets and
liabilities classified as held for sale for all periods presented in the statement
of financial position.
7.3 Income Statement Presentation of Discontinued Operations
ASC 205-20
45-3 The statement in which
net income of a business entity is reported or the
statement of activities of a not-for-profit entity
(NFP) for current and prior periods shall report
the results of operations of the discontinued
operation, including any gain or loss recognized
in accordance with paragraph 205-20-45-3C, in the
period in which a discontinued operation either
has been disposed of or is classified as held for
sale.
45-3A The results of all discontinued operations, less applicable income taxes (benefit), shall be reported
as a separate component of income. For example, the results of all
discontinued operations may be reported in the statement where net income of a business entity is reported
as follows.
45-3B A gain or loss recognized on the disposal (or loss recognized on classification as held for sale) shall be
presented separately on the face of the statement where net income is reported or disclosed in the notes to
financial statements (see paragraph 205-20-50-1(b)).
45-11 For any discontinued operation initially classified as held for sale in the current period, an entity shall
either present on the face of the statement of financial position or disclose in the notes to financial statements
(see paragraph 205-20-50-5B(e)) the major classes of assets and liabilities of the discontinued operation
classified as held for sale for all periods presented in the statement of financial position. Any loss recognized on
a discontinued operation classified as held for sale in accordance with paragraphs 205-20-45-3B through 45-3C
shall not be allocated to the major classes of assets and liabilities of the discontinued operation.
In the period in which a component meets the criteria for presentation as a
discontinued operation, the component’s results of operations, including any gain or
loss recognized, should be reclassified to discontinued operations. The illustration
in ASC 205-20-45-3A shows a possible income statement presentation related to such
reclassification; however, the illustration depicts a single-year presentation only.
If comparative income statements are presented, an entity should also reclassify the
component’s results of operations to discontinued operations for all prior periods.
See Example 7-2 for an
illustration of a multiyear presentation.
In the illustration in ASC 205-20-45-3A, the income tax benefit and the loss on disposal are presented as
separate line items; however, entities may (1) present discontinued operations as a single line item that
is labeled, for example, “discontinued operations net of tax,” and (2) disclose, in the notes, the income
tax benefit or expense and the gain or loss recognized.
See Section 3.5 for
more information about the requirement in ASC 205-20-45-11 that any loss should not
be allocated to specific assets or classes of assets.
Under ASC 205-20, in the period in which the discontinued-operations criteria are met, an entity must
report the disposal in discontinued operations retrospectively in all periods presented. SEC registrants
should also evaluate the reporting considerations discussed in Chapter 8.
Example 7-2
Illustrative Income Statement Presentation of a Discontinued Operation
This example is a continuation of Example 7-1 and shows a simplified, comparative
income statement for a component that meets the criteria for
presentation as a discontinued operation in the current
period.
See Example 7-8 for
an illustration of the disclosure in the notes to
the financial statements (see ASC 205-20-50-5B(b))
of the major classes of line items constituting a
discontinued operation’s pretax profit or loss. In
addition, see Section 8.7 of
Deloitte’s Roadmap Earnings per
Share for more information about
how entities that present discontinued operations
would account for and present EPS.
7.4 Presentation of Income Statement Items in Discontinued Operations
7.4.1 Asset Impairment Charges
Impairment charges related to the assets of a disposal group reported in
discontinued operations should be included in discontinued operations in the
current and prior periods, respectively. Such charges might include impairments
related to PP&E, intangible assets, and goodwill. It may be appropriate to
calculate the amount of a goodwill impairment charge on a relative fair value
basis if the goodwill assigned to the disposal group was calculated on a
relative fair value basis (see Section 3.4.1). Because ASC 350 requires disclosure of
cumulative goodwill impairment amounts, it is necessary to reasonably measure
cumulative goodwill impairments, if any, related to businesses disposed of to
eliminate such amounts from this ongoing disclosure.
7.4.2 Adjustments to Amounts Previously Reported in Discontinued Operations
ASC 205-20-45-4 states that “[a]djustments to amounts previously reported in
discontinued operations in a prior period shall be presented separately in the
current period in the discontinued operations section of the statement where net
income is reported.”
See Section 7.7.2 for
related disclosure requirements associated with adjustments to amounts
previously reported.
7.4.2.1 Classification and Disclosure of Contingencies
ASC 205-20-45-5 indicates that the resolution of certain contingencies
represents an adjustment to amounts previously reported and should be
recognized in discontinued operations in the current period. In SAB Topic
5.Z.5 (codified in ASC 205-20-S99-2), the SEC staff provided the guidance
below on the classification and disclosure of contingencies related to
discontinued operations. While the SAB was not revised to reflect the
amendments made by ASU
2014-08, we believe that it continues to provide
relevant guidance.
SEC Staff Accounting Bulletins
SAB Topic 5.Z.5,
Classification and Disclosure of Contingencies
Relating to Discontinued Operations
[Reproduced in ASC 205-20-S99-2]
Facts: A
company disposed of a component of an entity in a
previous accounting period. The Company received
debt and/or equity securities of the buyer of the
component or of the disposed component as
consideration in the sale, but this financial
interest is not sufficient to enable the Company to
apply the equity method with respect to its
investment in the buyer. The Company made certain
warranties to the buyer with respect to the
discontinued business, or remains liable under
environmental or other laws with respect to certain
facilities or operations transferred to the buyer.
The disposition satisfied the criteria of FASB ASC
Subtopic 205-20 for presentation as “discontinued
operations.” The Company estimated the fair value of
the securities received in the transaction for
purposes of calculating the gain or loss on disposal
that was recognized in its financial statements. The
results of discontinued operations prior to the date
of disposal or classification as held for sale
included provisions for the Company’s existing
obligations under environmental laws, product
warranties, or other contingencies. The calculation
of gain or loss on disposal included estimates of
the Company’s obligations arising as a direct result
of its decision to dispose of the component, under
its warranties to the buyer, and under environmental
or other laws. In a period subsequent to the
disposal date, the Company records a charge to
income with respect to the securities because their
fair value declined materially and the Company
determined that the decline was other than
temporary. The Company also records adjustments of
its previously estimated liabilities arising under
the warranties and under environmental or other
laws.
Question 1:
Should the writedown of the carrying value of the
securities and the adjustments of the contingent
liabilities be classified in the current period’s
statement of operations within continuing operations
or as an element of discontinued operations?
Interpretive
Response: Adjustments of estimates of
contingent liabilities or contingent assets that
remain after disposal of a component of an entity or
that arose pursuant to the terms of the disposal
generally should be classified within discontinued
operations.FN56 However, the staff
believes that changes in the carrying value of
assets received as consideration in the disposal or
of residual interests in the business should be
classified within continuing operations.
FASB ASC paragraph 205-20-45-4
requires that “adjustments to amounts previously
reported in discontinued operations that are
directly related to the disposal of a component of
an entity in a prior period shall be classified
separately in the current period in discontinued
operations.” The staff believes that the provisions
of FASB ASC paragraph 205-20-45-4 apply only to
adjustments that are necessary to reflect new
information about events that have occurred that
becomes available prior to disposal of the component
of the entity, to reflect the actual timing and
terms of the disposal when it is consummated, and to
reflect the resolution of contingencies associated
with that component, such as warranties and
environmental liabilities retained by the
seller.
Developments subsequent to the
disposal date that are not directly related to the
disposal of the component or the operations of the
component prior to disposal are not “directly
related to the disposal” as contemplated by FASB ASC
paragraph 205-20-45-4. Subsequent changes in the
carrying value of assets received upon disposition
of a component do not affect the determination of
gain or loss at the disposal date, but represent the
consequences of management’s subsequent decisions to
hold or sell those assets. Gains and losses,
dividend and interest income, and portfolio
management expenses associated with assets received
as consideration for discontinued operations should
be reported within continuing operations.
Question 2:
What disclosures would the staff expect regarding
discontinued operations prior to the disposal date
and with respect to risks retained subsequent to the
disposal date?
Interpretive
Response: MD&AFN57 should
include disclosure of known trends, events, and
uncertainties involving discontinued operations that
may materially affect the Company’s liquidity,
financial condition, and results of operations
(including net income) between the date when a
component of an entity is classified as discontinued
and the date when the risks of those operations will
be transferred or otherwise terminated. Disclosure
should include discussion of the impact on the
Company’s liquidity, financial condition, and
results of operations of changes in the plan of
disposal or changes in circumstances related to the
plan. Material contingent
liabilities,FN58 such as product or
environmental liabilities or litigation, that may
remain with the Company notwithstanding disposal of
the underlying business should be identified in
notes to the financial statements and any reasonably
likely range of possible loss should be disclosed
pursuant to FASB ASC Topic 450, Contingencies.
MD&A should include discussion of the reasonably
likely effects of these contingencies on reported
results and liquidity. If the Company retains a
financial interest in the discontinued component or
in the buyer of that component that is material to
the Company, MD&A should include discussion of
known trends, events, and uncertainties, such as the
financial condition and operating results of the
issuer of the security, that may be reasonably
expected to affect the amounts ultimately realized
on the investments.
________________________________________
FN56 Registrants are
reminded that FASB ASC Topic 460, Guarantees
requires recognition and disclosure of certain
guarantees which may impose accounting and
disclosure requirements in addition to those
discussed in this SAB Topic.
FN57 Item 303 of
Regulation S-K.
FN58 Registrants also
should consider the disclosure requirements of FASB
ASC Topic 460.
Example 7-3
Classification of a Gain Related to a Retained Equity Interest Sold in a Subsequent Period
Company D, an SEC registrant, is proposing to sell a significant subsidiary, Company T, which qualifies for
reporting as a discontinued operation. Because this transaction arose from an unexpected offer from Company
X, a third party, D does not have immediate plans for use of the proceeds from this sale. Accordingly, D would
like to retain an equity interest (common stock) of up to 10 percent for the next four to five years.
In addition, D has a put option on the retained equity interest in T to sell
this interest over a four-year period to X. Company
X also will receive a call option to purchase the
equity interest retained by D at the end of the
four-year period.
The gains resulting from D’s exercise of its put option to sell a portion of its retained interest in T, or the gains
resulting from X’s exercise of its call option to purchase the remaining interest in T, should be reported in
continuing operations since they (1) are not directly related to D’s initial sale of T to X and (2) have resulted
from management’s decision to hold and then sell a cost method investment. Furthermore, any increases or
decreases that may need to be reflected under other authoritative accounting pronouncements (e.g., ASC
320-10 and ASC 815) would be reported in continuing operations.
7.4.2.2 Settlements and Curtailments of Employee Benefit Plan Obligations
ASC 205-20-45-5(c) states that the “settlement of employee benefit plan
obligations (pension, postemployment benefits other than pensions, and other
postemployment benefits)” should be presented in discontinued operations in
the current period “provided that the settlement is directly related to the
disposal transaction.” This paragraph further notes that a “settlement is
directly related to the disposal transaction if there is a demonstrated
direct cause-and-effect relationship and the settlement occurs no later than
one year following the disposal transaction, unless it is delayed by events
or circumstances beyond an entity’s control.” By analogy, this concept would
also apply to a curtailment of an employee benefit plan that is directly
related to the disposal transaction. ASC 715-30-55-193 through 55-197
provide additional guidance on the impact of settlement or curtailment
expenses that are directly associated with a disposal transaction, and ASC
715-30-55-239 through 55-252 contain a related example.
7.4.3 Allocation of Interest to Discontinued Operations
ASC 205-20
45-6 Interest on debt that is to be assumed by the buyer and interest on debt that is required to be repaid as
a result of a disposal transaction shall be allocated to discontinued operations.
45-7 The allocation to discontinued operations of other consolidated interest that is not directly attributable
to or related to other operations of the entity is permitted but not required. Other consolidated interest that
cannot be attributed to other operations of the entity is allocated based on the ratio of net assets to be sold or
discontinued less debt that is required to be paid as a result of the disposal transaction to the sum of total net
assets of the consolidated entity plus consolidated debt other than the following:
- Debt of the discontinued operation that will be assumed by the buyer
- Debt that is required to be paid as a result of the disposal transaction
- Debt that can be directly attributed to other operations of the entity.
45-8 This allocation assumes
a uniform ratio of consolidated debt to equity for all
operations (unless the assets to be sold are atypical —
for example, a finance company — in which case a normal
debt-equity ratio for that type of business may be
used). If allocation based on net assets would not
provide meaningful results, then the entity shall
allocate interest to the discontinued operations based
on debt that can be identified as specifically
attributed to those operations. This guidance applies to
income statement presentation of both continuing and
discontinued operations (including the presentation of
the gain or loss on disposal of a component of an
entity). A decision as to interest allocation shall be
applied consistently to all discontinued operations.
Interest expense and amortization of discounts, premiums, and debt issuance costs related to debt that
will be assumed by the buyer or debt that must be repaid as a result of a disposal transaction should be
reported in discontinued operations. We also believe that gains or losses (e.g., prepayment penalties)
from the extinguishment of debt that is directly related to the component being disposed of should be
included in discontinued operations.
ASC 205-20-45-7 states that “[t]he allocation to discontinued
operations of other consolidated interest that is not directly attributable to
or related to other operations of the entity is permitted but not required.”
Entities that choose to allocate other consolidated interest to the discontinued
operation should use the allocation approach described in ASC 205-20-45-7 and
45-8, under which a “uniform ratio of consolidated debt to equity for all
operations” is assumed unless such an allocation would not provide meaningful
results. In that case, the entity must “allocate interest to the discontinued
operations based on debt that can be identified as specifically attributed to
those operations.” In addition, we believe that if an entity chooses to allocate
other consolidated interest to the discontinued operation, the entity should use
the same allocation method to allocate amortization of discounts, premiums, and
debt issuance costs.
ASC 205-20-45-8 also states that “[a] decision as to interest
allocation shall be applied consistently to all discontinued operations.”
Further, as noted in ASC 205-20-S99-3:
The SEC staff will
expect registrants electing to allocate interest in accordance with
paragraph 205-20-45-6 to clearly disclose the accounting policy (including
the method of allocation) and the amount allocated to and included in
discontinued operations for all periods presented.
7.4.4 Allocating Direct Expenses (but Not Indirect Expenses) to Discontinued Operations
ASC 205-20
45-9 General corporate overhead shall not be allocated to discontinued operations.
An entity should only include in discontinued operations direct operating
expenses incurred by the discontinued operation that (1) are clearly
identifiable as costs of the component (or group of components) being disposed
of and (2) the entity will not continue to recognize on an ongoing basis.
Potential direct costs that may be reported in discontinued operations include:
- Personnel costs for employees who worked solely for the disposed-of component.
- Costs associated with amortization of intangible assets used by the disposed-of component and disposed of in the transaction.
Indirect expenses, such as allocated corporate overhead (e.g., shared facility
costs, corporate shared service center costs) should not be included in
discontinued operations.
Example 7-4
Costs That Are Not Costs of the Component
A company allocates the salary costs of its executive committee to all of its divisions on the basis of total
revenues. No executive has direct responsibility for the division being disposed of; however, two executives
will be transferred with the division. The division meets the criteria for reporting in discontinued operations.
Because the costs are not clearly related to the division, the company may not include the salaries of the
transferred executives in discontinued operations.
Connecting the Dots
ASC 420-10-S99-1 contains the following guidance on presentation of
restructuring changes in discontinued operations:
The following is the text of SAB Topic 5.P.3, Income Statement
Presentation of Restructuring Charges.
Facts: Restructuring charges often
do not relate to a separate component of the entity, and, as
such, they would not qualify for presentation as losses on the
disposal of a discontinued operation.
Therefore, only restructuring changes that are directly related to the
component (or components) to be disposed of may be included in
discontinued operations.
Entities may need to carefully evaluate the facts and circumstances related to the
nature of certain costs when determining whether such costs should be allocated
to discontinued operations. For example, property insurance expense directly
related to individual facilities that are part of the disposed-of component may
be included in discontinued operations. However, it may not be appropriate to
allocate a portion of the entity’s corporate cybersecurity insurance expense to
the disposed-of component, even if the entity reasonably believes that the
cybersecurity insurance expense may decrease in the future after the
consummation of the disposal.
7.4.5 Allocating the Cost of Shared Assets to Discontinued Operations
Certain assets may be shared by components that will be disposed of and components that will be
retained. If an entity will retain the shared assets, the expenses related to the shared assets should not
be allocated to the discontinued operation because the entity will continue to recognize such costs on
an ongoing basis.
Example 7-5
Allocation of Part of an Asset’s Cost to Discontinued Operations
Company T, a public entity, currently reports three segments. In the current year, T implements a new
computer system that is purchased centrally and implemented and tailored separately for each of the three
segments. After implementing the computer system, T enters into an agreement to sell one of the segments.
The disposition of the segment will be reported as a discontinued operation.
Because T is retaining the central computer system and is not including it in the disposal group, T may not
allocate a portion of the overall costs incurred on the new computer system to the discontinued operation
being disposed of. In addition, if T recognizes any impairment related to the central computer system, the
impairment would not be included in discontinued operations.
7.4.6 Intercompany Sales Between an Entity and a Discontinued Operation
We believe that if an entity and its discontinued operation had intercompany
purchases and sales that were eliminated in consolidation, it is appropriate to
gross up and recast those sales and expenses in continuing operations and
discontinued operations if such sales or purchases will continue with the
discontinued operation after the disposal. As a result, the amount of
intercompany revenue and expenses that will remain with the consolidated group
after the disposal would be reflected in continuing operations and the amount of
intercompany revenue and expenses that will be disposed of would be presented in
discontinued operations. However, such presentation would not be appropriate for
intercompany sales for which the inventory has not yet been sold to third-party
customers. Grossing up revenue and expenses for inventory that has not yet been
sold to third-party customers would result in the presentation of revenue and
expenses that exceed the amounts the entity would have reported in its
consolidated financial statements after intercompany eliminations.
Example 7-6
Presentation of Intercompany Sales Related to a Discontinued
Operation
Company A is a paper manufacturing
company and owns a distribution business, Subsidiary X,
that buys paper from A and then sells the paper to
outside customers. In its consolidated financial
statements, A has appropriately eliminated the
intercompany sales between itself and X and therefore
only recognizes the sales from X to customers.
Company A is planning to sell X to
another paper manufacturer. After the disposal, X will
continue to purchase paper from A to sell to outside
customers. Therefore, A will continue to have sales to X
that will not be eliminated when X is no longer a
subsidiary. Company A has concluded that even though it
will have continuing involvement with X after the
disposition, the disposition of X should be presented in
discontinued operations.
Assume that during the reporting period, A sells paper to
X for $6 and makes a profit of $2 (i.e., cost of $4) and
that X sells paper to outside customers for $7 and makes
a profit of $1. In A’s consolidated financial
statements, the intercompany sales of $6 will be
eliminated along with the $6 cost of sales, leaving a
profit of $3, as follows:
Therefore, A would present the following:
- In continuing operations, revenue of $6, cost of sales of $4, and a profit of $2 representing the sales from A to X.
- In discontinued operations, a profit of $1 representing the sales from X to outside customers.
After the disposal (if the facts are the same), when A
sells paper to X, it will have the same $6 sale, $4 cost
of sales, and $2 profit in its continuing operations and
will not have the additional $1 profit from sales to the
outside customers.
This presentation only applies to paper
that was sold to third-party customers during the
reporting period. Any profit on intercompany
transactions between A and X for which the paper has not
been sold to third-party customers during the reporting
period should be eliminated.
7.4.7 Transition Services
When a component is sold or spun off, an entity often enters into agreements with the buyer or with the
component to provide certain services to the component, usually for a specified period (e.g., one year).
Such arrangements are often called “transition service arrangements.” The revenues and expenses
associated with transition services provided to a discontinued operation after its disposal should be
reported in continuing operations because such services are part of the entity’s continuing activities. The
entity should use judgment in determining the income statement line item in which to report the income
and expenses. For example, revenues from transition services would generally be recognized as other
income if the services are not part of the entity’s recurring revenue-generating activities.
7.4.8 Changes in the Carrying Value of Assets Received as Consideration
In some transactions, an entity may receive noncash consideration in exchange
for a discontinued operation. Question 1 from SAB Topic 5.Z.5 (codified in ASC
205-20-S99-2) states:
[T]he staff believes that changes in
the carrying value of assets received as consideration in the disposal or of
residual interests in the business should be classified within continuing
operations. . . . Subsequent changes in the carrying value of assets
received upon disposition of a component do not affect the determination of
gain or loss at the disposal date, but represent the consequences of
management’s subsequent decisions to hold or sell those assets. Gains and
losses, dividend and interest income, and portfolio management expenses
associated with assets received as consideration for discontinued operations
should be reported within continuing operations.
7.4.9 Income Taxes
See Deloitte’s Roadmap Income Taxes for more information about income taxes
related to discontinued operations.
7.4.10 Reflecting a Successor’s Discontinued Operations in the Predecessor Period
According to paragraph 13210.2 of the SEC Division of Corporation Finance’s
Financial Reporting Manual (FRM), when an SEC registrant is a successor to a
predecessor entity and meets the criteria for reporting a discontinued
operation, the predecessor financial statements must be retrospectively recast
“to reflect the impact of a successor’s discontinued operations.” Paragraph
13210.2 further states that “[r]egistrants should contact the staff if unusual
facts and circumstances may prohibit the company’s ability to reclassify
predecessor fiscal periods.”
Such presentation enhances comparability for the discontinued operation for all
fiscal periods presented. However, if there are unique facts or circumstances
that could potentially prevent the reclassification of predecessor periods the
entity is advised to discuss the situation with the SEC staff. Although the
staff’s views specifically apply to SEC registrants, we believe that private
companies that present predecessor and successor financial statements may also
consider following this guidance.
This SEC guidance is limited to discontinued operations and does not extend to
certain other retrospective changes, such as the retrospective adoption of a new
accounting principle or a change in accounting principle, which are not “pushed
back” into the predecessor period. See Section
A.16.2 of Deloitte’s Roadmap Business Combinations for more information.
7.5 Overview of Disclosures About Discontinued Operations
ASC 205-20
05-2
The required disclosures about discontinued operations vary
depending on the nature of the discontinued operation. For
example, if a discontinued operation includes a component or
group of components of an entity that is not an equity
method investment, a more comprehensive set of disclosures
about the discontinued operation is required. If the
discontinued operation includes an equity method investment,
or a business or nonprofit activity that is classified as
held for sale on acquisition, a more limited set of
disclosures is required (see the flowchart in paragraph
205-20-55-82 for an illustration).
Under ASC 205-20, certain disclosures are required for all disposals
that qualify as a discontinued operation; however, the disclosure requirements for
disposals of an equity method investment or a business or nonprofit activity
classified as held for sale on acquisition are more limited.
Disclosure requirements other than those in ASC 205-20 primarily
inform financial statement users about an entity’s continuing operations. While the
extent of certain disclosures may vary on the basis of the facts and circumstances,
we believe that disclosures required for continuing operations under other
Codification topics (e.g., ASC 350 on goodwill and other intangible assets, ASC 606
on revenue, ASC 842 on leases) are generally not required for a component that is
presented in discontinued operations. However, certain disclosures required by ASC
275 (e.g., those pertaining to risks and uncertainties associated with the use of
estimates) may also be appropriate for discontinued operations.
See Section 7.11 for a flowchart that provides an overview of
the disclosures required for discontinued operations.
7.6 Disclosures That Apply to All Discontinued Operations
The disclosures in ASC 205-20-50-1 below are required in periods in which a
discontinued operation is classified as held for sale or has been otherwise disposed
of, including disposals of equity method investments and newly acquired businesses
or nonprofit activities classified as held for sale at acquisition.
ASC 205-20
50-1 The following shall be disclosed in the notes to financial statements that cover the period in which a discontinued operation either has been disposed of or is classified as held for sale under the requirements of paragraph 205-20-45-1E:
- A description of both of the following:
- The facts and circumstances leading to the disposal or expected disposal
- The expected manner and timing of that disposal.
- If not separately presented on the face of the statement where net income is reported (or statement of activities for a not-for-profit entity) as part of discontinued operations (see paragraph 205-20-45-3B), the gain or loss recognized in accordance with paragraph 205-20-45-3C.
- Subparagraph superseded by Accounting Standards Update No. 2014-08.
- If applicable, the segment(s) in which the discontinued operation is reported under Topic 280 on segment reporting.
7.7 Other Required Disclosures
The disclosures in ASC 205-20-50-3 through 50-4B concern changes to a plan of
sale, adjustments to amounts previously reported, and continuing involvement. These
disclosures must be provided for all discontinued operations to which these events
or circumstances apply.
7.7.1 Changes to a Plan of Sale
ASC 205-20
50-3 An entity may change its plan of sale as addressed in paragraph 360-10-35-44 or paragraph 360-10-35-45. In the period in which the decision is made to change the plan for selling the discontinued operation, an
entity shall disclose in the notes to financial statements a description of the facts and circumstances leading
to the decision to change that plan and the change’s effect on the results of operations for the period and any
prior periods presented.
As described in ASC 205-20-45-1F, an entity may change its plan and decide not
to sell a component that was classified as held for sale and presented in
discontinued operations. In the period in which the discontinued operation no
longer meets the held-for-sale criteria, both the balance sheet and income
statement should be reclassified for all periods presented (i.e., the assets and
liabilities of the discontinued operation should be reclassified as held and
used and the operations should be reclassified to continuing operations). An
entity must also provide the above disclosures in accordance with ASC
205-20-50-3. In addition, if the entity disclosed the carrying amounts of assets
and liabilities of a disposal group, such disclosure should be removed. See
Section 3.9 for
a discussion of the accounting for changes to a plan to sell.
7.7.2 Adjustments to Amounts Previously Reported
ASC 205-20
50-3A The nature and amount of adjustments to amounts previously reported in discontinued operations that are directly related to the disposal of a discontinued operation in a prior period shall be disclosed (see paragraph 205-20-45-5 for examples of circumstances in which those types of adjustments may arise).
ASC 205-20-45-4 states that “[a]djustments to amounts previously reported in discontinued operations in a prior period shall be presented separately in the current period in the discontinued operations section of the statement where net income is reported.”
ASC 205-20-50-3A requires disclosure of the nature and amount of such
adjustments. See Section
7.4.2 for presentation requirements and examples of adjustments to
amounts previously reported.
7.7.3 Disclosures About Continuing Involvement, Including Retained Equity Method Investments
ASC 205-20
50-4A An entity shall disclose information about its significant continuing involvement with a discontinued operation after the disposal date. Examples of continuing involvement with a discontinued operation after the disposal date include a supply and distribution agreement, a financial guarantee, an option to repurchase a discontinued operation, and an equity method investment in the discontinued operation. The disclosures are required until the results of operations of the discontinued operation in which an entity retains significant continuing involvement are no longer presented separately as discontinued operations in the statement where net income is reported (or statement of activities for a not-for-profit entity).
50-4B An entity shall disclose the following in the notes to financial statements for each discontinued operation in which the entity retains significant continuing involvement after the disposal date:
- A description of the nature of the activities that give rise to the continuing involvement.
- The period of time during which the involvement is expected to continue.
- For all periods presented, both of the following:
- The amount of any cash inflows or outflows from or to the discontinued operation after the disposal transaction
- Revenues or expenses presented, if any, in continuing operations after the disposal transaction that before the disposal transaction were eliminated in consolidated financial statements as intra-entity transactions.
- For a discontinued operation in which an entity retains an equity method investment after the disposal (the investee), information that enables users of financial statements to compare the financial performance of the entity from period to period assuming that the entity held the same equity method investment in all periods presented in the statement where net income is reported (or statement of activities for a not-for-profit entity). The disclosure shall include all of the following until the discontinued operation is no longer reported separately in discontinued operations:
- For each period presented in the statement where net income is reported (or statement of activities for a not-for-profit entity) after the period in which the discontinued operation was disposed of, the pretax income of the investee in which the entity retains an equity method investment
- The entity’s ownership interest in the discontinued operation before the disposal transaction
- The entity’s ownership interest in the investee after the disposal transaction
- The entity’s share of the income or loss of the investee in the period(s) after the disposal transaction and the line item in the statement where net income is reported (or statement of activities for a not-for-profit entity) that includes the income or loss.
As described in ASC 205-20-50-4A above, an entity must disclose “information
about its significant continuing involvement with a discontinued operation after
the disposal date.” See Section
5.5 for examples of significant continuing involvement. Because ASC
205-20 does not provide guidance on what level of continuing involvement would
be considered “significant” with respect to these disclosure requirements, an
entity will need to use judgment.
7.7.4 Entities in Bankruptcy
Entities that are in bankruptcy should consider the presentation
requirements in ASC 852-10-45-9, which states:
The statement of operations shall portray the results of
operations of the reporting entity while it is in Chapter 11. Revenues,
expenses (including professional fees), realized gains and losses, and
provisions for losses resulting from the reorganization and
restructuring of the business shall be reported separately as
reorganization items, except for those required to be reported as
discontinued operations in conformity with Subtopic 205-20.
7.8 Disclosures for a Discontinued Operation That Was Not an Equity Method Investment Before Its Disposal
ASC 205-20
50-5A Paragraphs 205-20-50-5B through 50-5D provide disclosures required for discontinued operations that
meet the criteria in paragraphs 205-20-45-1B through 45-1C except for a discontinued operation that was an
equity method investment before the disposal. For disclosures required for discontinued operations that were
equity method investments before the disposal, see paragraph 205-20-50-7.
Entities that dispose of a component that qualifies as a discontinued operation,
other than a discontinued operation that was an equity method investment before the
disposal, must disclose the information required by ASC 205-20-50-5B through 50-5D
to the extent that such information is not presented on the face of its financial
statements. See Section 7.9 for
the disclosure requirements for an equity method investment that qualifies as a
discontinued operation.
ASC 205-20
50-5B An entity shall disclose, to the extent not presented on the face of the financial statements as part of
discontinued operations, all of the following in the notes to financial statements:
- The pretax profit or loss (or change in net assets for a not-for-profit entity) of the discontinued operation for the periods in which the results of operations of the discontinued operation are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity).
- The major classes of line items constituting the pretax profit or loss (or change in net assets for a not-for-profit entity) of the discontinued operation (for example, revenue, cost of sales, depreciation and amortization, and interest expense) for the periods in which the results of operations of the discontinued operation are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity).
- Either of the following:
- The total operating and investing cash flows of the discontinued operation for the periods in which the results of operations of the discontinued operation are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity).
- The depreciation, amortization, capital expenditures, and significant operating and investing noncash items of the discontinued operation for the periods in which the results of operations of the discontinued operation are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity).
- If the discontinued operation includes a noncontrolling interest, the pretax profit or loss (or change in net assets for a not-for-profit entity) attributable to the parent for the periods in which the results of operations of the discontinued operation are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity).
- The carrying amount(s) of the major classes of assets and liabilities included as part of a discontinued operation classified as held for sale for the period in which the discontinued operation is classified as held for sale and all prior periods presented in the statement of financial position. Any loss recognized on the discontinued operation classified as held for sale in accordance with paragraphs 205-20-45-3B through 45-3C shall not be allocated to the major classes of assets and liabilities of the discontinued operation.
50-5C If an entity provides the disclosures required by paragraph 205-20-50-5B(a), (b), and (e) in the notes to financial statements, the entity shall disclose the following:
- For the initial period in which the disposal group is classified as held for sale and for all prior periods presented in the statement of financial position, a reconciliation of both of the following:
-
The amounts disclosed in paragraph 205-20-50-5B(e)
-
Total assets and total liabilities of the disposal group classified as held for sale that are presented separately on the face of the statement of financial position. If the disposal group includes assets and liabilities that are not part of the discontinued operation, an entity shall present those assets and liabilities in line items in the reconciliations that are separate from the assets and liabilities of the discontinued operation (see paragraph 205-20-55-102 for an Example).
-
- For the periods in which the results of operations of the discontinued operation are reported in the statement where net income is reported (or statement of activities for a not-for-profit entity), a reconciliation of both of the following:
- The amounts disclosed in paragraph 205-20-50-5B(a) and (b)
- The after-tax profit or loss from discontinued operations presented on the face of the statement where net income is reported (or statement of activities for a not-for-profit entity) (see paragraph 205-20-55-103 for an Example).
50-5D For purposes of the reconciliation in paragraph 205-20-50-5C(a) or (b), an entity may aggregate the amounts that are not considered major and present them as one line item in the reconciliation.
7.8.1 Balance Sheet Disclosures for a Discontinued Operation That Was Not an Equity Method Investment Before Its Disposal
In the period in which the discontinued-operations presentation criteria are met
and for all comparative periods, the entity must provide detailed information
about the major classes of assets and liabilities of the discontinued operation.
If the entity does not present the discontinued operation’s major classes of
assets and liabilities on the face of the balance sheet in accordance with ASC
205-20-45-10 (see Section
7.2), the entity must disclose such information in the notes in
accordance with ASC 205-20-50-5B(e).
ASC 205-20-50-5C(a) also requires that the entity provide a reconciliation of the amounts disclosed in ASC 205-20-50-5B(e) to the amounts in the balance sheet. If the disposal group includes assets or liabilities that are not part of the discontinued operation, those assets should be separately presented in the reconciliation. ASC 205-20-50-5D allows entities to aggregate amounts that are not major into a single line item. ASC 205-20 does not provide any guidance on what constitutes “major” in this context. Accordingly, entities will need to use judgment.
The implementation guidance in ASC 205-20-55-102 illustrates the disclosure
requirement in ASC 205-20-50-5C(a).
ASC 205-20
55-102 The
table in this illustration provides one example of
how to disclose the reconciliation required by
paragraph 205-20-50-5C(a).
The following illustration is a continuation of Examples 7-1 and 7-2 and demonstrates how
an entity might disclose the reconciliations required by ASC
205-20-50-5C(a).
Example 7-7
Illustration of the Disclosure Requirements in ASC 205-20-50-5C(a)
7.8.2 Income Statement Disclosures for a Discontinued Operation That Was Not an Equity Method Investment Before Its Disposal
In the period in which a component meets the criteria for presentation as a discontinued operation and for all comparative periods, the entity must provide detailed information about the discontinued operation’s pretax profit or loss in accordance with ASC 205-20-50-5B(a) and the major classes of line items constituting pretax profit or loss, including any noncontrolling interest, in accordance with ASC 205-20-50-5B(b) and (d).
ASC 205-20-50-5C(b) also requires that the entity provide a reconciliation of the amounts disclosed in ASC 205-20-50-5B(a) and (b) to the amounts on the face of the income statement. ASC 205-20-50-5D allows entities to aggregate amounts that are not major into a single line item. Again, ASC 205-20 does not provide any guidance on what constitutes “major” with respect to this disclosure requirement, so entities will need to use judgment.
The implementation guidance in ASC 205-20-55-103 illustrates the disclosure
requirement in ASC 205-20-50-5C(b).
ASC 205-20
55-103 The table in this illustration provides one example of how to disclose the reconciliation required by paragraph 205-20-50-5C(b).
The following illustration is a continuation of Examples 7-1 and 7-2 and demonstrates how an entity might
disclose the reconciliations required by ASC 205-20-50-5C(b).
Example 7-8
Illustration of the Disclosure Requirements in ASC 205-20-50-5C(b)
7.8.3 Cash Flow Disclosures for a Discontinued Operation That Was Not an Equity Method Investment Before Its Disposal
ASC 205-20
50-5B An entity shall
disclose, to the extent not presented on the face
of the financial statements as part of
discontinued operations, all of the following in
the notes to financial statements: . . .
c. Either of the following:
1. The total operating
and investing cash flows of the discontinued
operation for the periods in which the results of
operations of the discontinued operation are
presented in the statement where net income is
reported (or statement of activities for a
not-for-profit entity)
2. The depreciation,
amortization, capital expenditures, and
significant operating and investing noncash items
of the discontinued operation for the periods in
which the results of operations of the
discontinued operation are presented in the
statement where net income is reported (or
statement of activities for a not-for-profit
entity). . . .
See Section 3.3 of Deloitte’s Roadmap
Statement of Cash Flows for
more information.
7.9 Disclosures for a Discontinued Operation That Was an Equity Method Investment Before Its Disposal
ASC 205-20
50-7 For an equity method investment that meets the criteria in paragraphs 205-20-45-1B through 45-1C, an entity shall disclose summarized information about the assets, liabilities, and results of operations of the investee if that information was disclosed in financial reporting periods before the disposal in accordance with paragraph 323-10-50-3(c).
ASC 323-10-50-3(c) requires an entity to disclose summarized information about assets, liabilities, and results of operations “in the notes or in separate statements, either individually or in groups, as appropriate,” if the equity method investments “are, in the aggregate, material in relation to the financial position or results of operations of an investor.” The Board concluded that if such information was disclosed or provided in periods before the disposal, the same information should be disclosed in the period of the disposal and for all periods presented until the discontinued-operations presentation is no longer included in the financial statements. Such disclosure could enable financial statement users to understand the impact of the disposal on the entity.
7.10 Disclosures for a Business or a Nonprofit Activity Classified as Held for Sale Upon Acquisition
ASC 205-20 requires more limited disclosures for a business or nonprofit
activity that is classified as held for sale on acquisition.
Specifically, an entity must provide the disclosures required by (1)
ASC 205-20-50-1, (2) ASC 205-20-50-3 if there is a change to the
plan of sale, (3) ASC 205-20-50-3A if there are any adjustments to
amounts previously reported, and (4) ASC 205-20-50-4A and 50-4B if
the entity will have any significant continuing involvement with the
business or nonprofit activity. The entity would not be required to
provide the disclosures in ASC 205-20-50-5A through 50-7.
7.11 Flowchart of the Required Disclosures for Discontinued Operations
ASC 205-20
55-82 The following flowchart provides an overview of the disclosures required for discontinued operations.
Pending Content (Transition Guidance: ASC
805-60-65-1)
55-82 The following flowchart provides
an overview of the disclosures required for
discontinued operations.
Changing Lanes
In August 2023, the FASB issued
ASU 2023-05,
which requires entities that qualify as either a
joint
venture or a corporate joint venture, as defined in
the ASC master glossary, to apply a new basis of
accounting upon the formation of the joint venture.
The ASU’s amendments “are effective prospectively
for all joint venture formations with a formation
date on or after January 1, 2025.” Early adoption is
permitted.
The ASU amends ASC 205-10-05-3(b), and
makes related amendments to ASC 205-20, to indicate
that a “business or nonprofit activity that, on
acquisition or upon formation of a joint venture, is
classified as held for sale” by the newly formed
joint venture would be reported as a discontinued
operation.
7.12 Recasting of Prior Periods Because of the Disposal of Part of an Operating Segment
ASC 280-10
55-7 If a reportable segment
meets the conditions in paragraphs 205-20-45-1A
through 45-1G to be reported in discontinued
operations, an entity is not required to also
disclose the information required by this
Subtopic. Paragraph 280-10-55-19 addresses whether
there is a need to recast previously reported
information if there is a disposal of a component
that was previously disclosed as a reportable
segment.
Pending
Content (Transition Guidance: ASC 280-10-65-1)
55-7
If a reportable segment meets the conditions in
paragraphs 205-20-45-1A through 45-1G to be
reported in discontinued operations, an entity is
not required to also disclose the information
required by this Subtopic. Paragraph 280-10-55-19
addresses whether there is a need to recast
previously reported information if there is a
disposal of a component that was previously
disclosed as a reportable segment.
55-19 Segment information for
prior periods for disposal of a component that was
previously disclosed as a reportable segment is
not required to be recast. However, if the income
statement and balance sheet information for the
discontinued component have been reclassified in
comparative financial statements, the segment
information for the discontinued component need
not be provided for those periods. Paragraph
280-10-55-7 addresses disclosure requirements if a
component of a public entity that is reported as a
discontinued operation is a reportable
segment.
Pending Content (Transition Guidance: ASC
280-10-65-1)
55-19 Segment information for prior
periods for disposal of a component that was
previously disclosed as a reportable segment is
not required to be recast. However, if the income
statement and balance sheet information for the
discontinued component have been reclassified in
comparative financial statements, the segment
information for the discontinued component need
not be provided for those periods. Paragraph
280-10-55-7 addresses disclosure requirements if a
component of a public entity that is reported as a
discontinued operation is a reportable
segment.
ASC 280-10-55-7 notes that when the discontinued operation is a reportable
segment, an entity is not required to separately disclose
information for the discontinued operation within the segment
footnote. However, if the discontinued operation is only a component
of a reportable segment, the entity should recast prior periods to
exclude the discontinued operation in the disclosures for the
reportable segment, beginning in the period in which the component
is presented as a discontinued operation.
We believe that the failure of a disposal to meet the criteria to be presented
as a discontinued operation would not be considered a change in an
entity’s internal organization that causes the composition of its
reportable segments to change. Accordingly, prior periods would not
need to be recast.
Example 7-9
Company A has identified the following reportable segments: computer hardware,
computer software, and customer service. Before
year-end, A disposed of a portion of its computer
hardware segment, and the disposal does not meet
the criteria to be presented as a discontinued
operation.
In preparing the current-year segment disclosures, A is not required to recast
prior-period segment information to remove the
portion of the computer hardware segment disposed
of before year-end or to quantify the effect in
the segment footnote.
7.13 Interim Disclosures
Entities that issue interim financial data, such as SEC registrants, should consider
the disclosure requirements in ASC 270. Specifically, ASC 270-10-45-11A states:
Effects of disposals of a component of an entity and unusual or infrequently
occurring transactions and events that are material with respect to the
operating results of the interim period shall be reported separately. Gains
or losses from disposal of a component of an entity and unusual or
infrequently occurring items shall not be prorated over the balance of the
fiscal year.
In addition, ASC 270-10-50-2 states, in part:
If interim financial data and disclosures are not separately reported for the
fourth quarter, users of the interim financial information often make
inferences about that quarter by subtracting data based on the third quarter
interim report from the annual results. In the absence of a separate fourth
quarter report or disclosure of the results (as outlined in the preceding
paragraph) for that quarter in the annual report, disposals of components of
an entity and unusual or infrequently occurring items recognized in the
fourth quarter, as well as the aggregate effect of year-end adjustments that
are material to the results of that quarter (see paragraphs 270-10-05-2 and
270-10-45-10) shall be disclosed in the annual report in a note to the
annual financial statements.
Chapter 8 — Reporting Considerations for SEC Registrants
Chapter 8 — Reporting Considerations for SEC Registrants
8.1 Overview
As noted in Chapter 5, in the period in which a component meets the criteria in
ASC 205-20 for presentation as a discontinued operation, a registrant must present
the component as a discontinued operation retrospectively for all prior periods
presented. Accordingly, SEC registrants must consider the impact of the
retrospective change on the historical financial statements included in their
Exchange Act reports (e.g., Forms 10-K and 10-Q), registration statements under the
Securities Act (e.g., registration statements on Form S-3), and other nonpublic
offerings. Registrants may also be required to report a disposition, including
certain disposals that do not qualify as discontinued operations,1 on a Form 8-K and provide pro forma financial
information that gives effect to the disposition. Further, registrants must consider
the impact the revised financial statements may have on other SEC requirements
(e.g., SEC Regulation S-X, Rules 3-05, 3-09, 4-08(g), and 3-10). In addition,
registrants undertaking an IPO may be able to consider using a “to-be-issued”
accountant’s report in certain circumstances.
Footnotes
1
When either a subsidiary is deconsolidated or a group of
assets is derecognized, SEC registrants may be required to report the
deconsolidation or derecognition on a Form 8-K and provide pro forma
financial information that gives effect to the deconsolidation or
derecognition. For more information, see Section F.4 of Deloitte’s Roadmap
Consolidation —
Identifying a Controlling Financial Interest.
8.2 Financial Statements and Other Affected Financial Information in Exchange Act Reports
When a component meets the criteria in ASC 205-20 for presentation as a
discontinued operation, the component’s results of operations must be
retrospectively reclassified to discontinued operations in the current period and
all prior periods presented when it first reports the discontinued operation.
MD&A and other affected financial information for prior periods should also be
updated to reflect the retrospective adjustment.
Registrants that present three years of financial statements may
omit discussion of the earliest year of changes in financial condition and results
of operations if such discussion was already included in any of the registrants’
prior EDGAR filings that required such information. Registrants electing to omit
such discussion must disclose, in the current filing, the location of such
discussion in the prior filing. Registrants should consider the total mix of
available information, including the impact of any recastable events (e.g., a
retrospective accounting change such as a discontinued operation) on the
prior-period MD&A, when determining whether to omit discussion of the earliest
year and the most appropriate form of presentation. If a registrant concludes that
it is necessary to discuss operations related to the earliest period presented, it
may limit the discussion to the information that has changed or has been determined
to be significant to its operations or financial condition.
If a discontinued operation is first reported in interim financial statements in
a Form 10-Q, a registrant is not immediately required to retrospectively adjust the
annual financial statements presented in the most recent Form 10-K (annual pre-event
financial statements) to reflect the discontinued operation. A registrant is
generally not required to adjust the annual pre-event financial statements to
reflect the discontinued operation until they are comparatively presented with the
annual financial statements that report the discontinued operation (generally in the
registrant’s next Form 10-K). However, see Section
8.3
for circumstances in which this requirement may be accelerated.
In addition, SEC Regulation S-K, Item 302(a), requires that if a registrant reports a
material retrospective change (or changes), such as discontinued operations, for any
of the quarters within the two most recent fiscal years, the registrant must
disclose (1) an explanation for the material change(s) and (2) summarized financial
information reflecting such change(s) for the affected quarterly periods, including
the fourth quarter. Summarized financial information, which is required in a Form
10-K and certain registration statements, should include, at a minimum:
- Net sales or gross revenues.
- Gross profit (or costs and expenses related to net sales or gross revenues).
- Income (loss) from continuing operations.
- Net income (loss).
- Net income (loss) attributable to the entity.
- Earnings (loss) per share.
Since this requirement only applies when there is a material
retrospective change, a registrant may not have provided such information in its
most recent Form 10-K. However, upon reporting a material discontinued operation, a
registrant would be required to include such disclosure in its next Form 10-K or
retrospectively revised financial statements filed in conjunction with certain
registration statements, as discussed below.
Example 8-1
Form 10-Q That First Reports a Component as a Discontinued Operation
Company A, an SEC registrant, determines that it has met the requirements for
presenting Component B as a discontinued operation on March
1, 20X6. When A files its Form 10-Q for the quarter ended
March 31, 20X6, it must retrospectively reclassify B’s
results as a discontinued operation for the comparative
interim period ended March 31, 20X5. Company A must also
update MD&A for the interim period ended March 31, 20X5,
to reflect the retrospective adjustments. However, there is
no immediate requirement for A to retrospectively reclassify
B’s results as a discontinued operation for the annual
financial statements presented in its Form 10-K for the year
ended December 31, 20X5.
Further, Question 2 of SAB Topic 5.Z.5 provides interpretive
guidance on disclosures that the staff would expect “regarding discontinued
operations prior to the disposal date and with respect to risks retained subsequent
to the disposal date.” Question 2 further states:
MD&A
[footnote omitted] should include disclosure of known trends, events, and
uncertainties involving discontinued operations that may materially affect the
Company’s liquidity, financial condition, and results of operations (including
net income) between the date when a component of an entity is classified as
discontinued and the date when the risks of those operations will be transferred
or otherwise terminated. Disclosure should include discussion of the impact on
the Company’s liquidity, financial condition, and results of operations of
changes in the plan of disposal or changes in circumstances related to the plan.
Material contingent liabilities . . . [footnote omitted] that may remain with
the Company notwithstanding disposal of the underlying business should be
identified in notes to the financial statements and any reasonably likely range
of possible loss should be disclosed pursuant to FASB ASC Topic 450,
Contingencies. MD&A should include discussion of the reasonably likely
effects of these contingencies on reported results and liquidity. If the Company
retains a financial interest in the discontinued component or in the buyer of
that component that is material to the Company, MD&A should include
discussion of known trends, events, and uncertainties, such as the financial
condition and operating results of the issuer of the security, that may be
reasonably expected to affect the amounts ultimately realized on the
investments.
Similarly, for dispositions that do not qualify as discontinued
operations, certain disclosures within the Exchange Act reports must be provided
outside the financial statements. SEC Regulation S-K, Item 303, and paragraph 9220.2 of the
FRM require registrants to describe in MD&A any unusual or infrequent events or
transactions that materially affected the amount of reported income from continuing
operations and, in each case, indicate the extent to which income was affected. Such
a description would include any material disposal transactions for the periods
covered, even if those transactions did not meet the discontinued-operations
criteria in ASC 205-20.
8.3 Registration Statements and Other Nonpublic Offerings
The requirement to retrospectively revise the annual pre-event financial
statements and other affected financial information may be accelerated when the
pre-event financial statements are reissued, as discussed in ASC 855-10-25-4 (see
Form S-3, Item 11(b)(ii)). Such reissuance may occur when a registrant (1) files a
new or amended registration statement, (2) files a Form S-8, (3) issues a prospectus
supplement to a currently effective registration statement (e.g., an existing Form
S-3 that already is effective but upon which the registrant wishes to draw down or
issue securities), or (4) issues securities in a nonpublic offering. The discussion
below addresses these requirements in the context of a discontinued operation. A
registrant may need to similarly consider other retrospective changes, such as stock
splits, changes in segment presentation under ASC 280, and certain accounting
changes resulting from the adoption of a newly issued standard.
For dispositions that do not qualify as discontinued operations,
reporting considerations highlighted in Section 8.2 that apply to MD&A will also
generally apply to registration statements.
8.3.1 New Registration Statements (Other Than Form S-8)
If a registrant files a new or amended registration statement2
before it files the Form 10-Q that first reports a
discontinued operation, the registrant is not required (or permitted3) to file updated financial statements for prior periods to reflect the
discontinued operation. However, the registrant should consult with its legal
counsel and independent accountants regarding the appropriate disclosure to
provide in the registration statement, including the pro forma considerations
discussed in Section
8.5.
If a registrant files a new or amended registration statement after it files the Form 10-Q that first reports a
discontinued operation, the registration statement instructions (e.g., Item
11(b)(ii) of Form S-3) generally require a registrant to file updated financial
statements that reflect the discontinued operation for all periods presented. In
addition, other affected financial information (e.g., MD&A and selected
quarterly financial data) also generally should be updated to reflect the
retrospective adjustments.
Connecting the Dots
As discussed above, a registrant that reports a material
retrospective change must disclose selected quarterly financial data for
the quarters within the two most recent fiscal years. Since this
requirement only applies when there is a
material retrospective change, a registrant’s previous Form 10-K may not
include such disclosures. Nonetheless, when retrospectively revising the
financial statements and other affected financial information before
filing a new or amended registration statement, a registrant may be
required to include summarized financial information for the quarters
within the two most recent fiscal years to reflect a new discontinued
operation reported in a recent Form 10-Q.
For example, when filing a new Form S-3, a registrant
must retrospectively revise its financial statements for a material
retrospective change before filing the Form S-3. However, the Form S-3
is not required to include Item 302(a) selected quarterly financial data
for the new retrospective change (i.e., a discontinued operation
reported in a recent Form 10-Q). Therefore, a registrant that did not
previously provide such quarterly disclosures in its Form 10-K would not
be required to do so as a result of the new Form S-3. On the other hand,
when a registrant previously provided such quarterly disclosures in its
Form 10-K (whether required or voluntary), it must consider whether such
quarterly disclosures continue to be appropriate in light of the new
retrospective change. A registrant would generally revise such quarterly
information for the new retrospective change to the extent that the
revision is material. If a registrant is not eligible to use Form S-3
and the requirements related to the new registration statement include
those in Item 302(a) (e.g., Form S-1), the registrant would need to
provide the appropriate quarterly disclosures under Item 302(a) in
connection with that new registration statement.
For new or amended registration statements that normally incorporate the
financial statements by reference (e.g., Form S-3), the registrant may file
updated financial statements as well as other affected financial information
that reflects the retrospective adjustments on Form 8-K; alternatively, the
registrant can include the retrospectively adjusted financial statements and
related information in the registration statement being filed. If the recasted
information is filed on Form 8-K, the Form 8-K will be incorporated by reference
into the registration statement and will update the affected sections of the
registrant’s previously filed Exchange Act reports (e.g., Form 10-K or Form
10-Q). Because they were not incorrect when filed, prior Exchange Act reports
should not be amended (i.e., the registrant should not file a Form 10-K/A or
Form 10-Q/A). For more information, see Topic 13 of the FRM.
To prepare itself for a potential registration statement, a registrant is
permitted to file updated financial statements and other affected financial
information that reflect the retrospective adjustments in a Form 8-K once the
discontinued operation has been reported in a Form 10-Q. However, the registrant
is not required to do so until immediately before a registration statement is
filed. If the registrant expects to file a new registration statement, it may
file the Form 8-K simultaneously with or any time after the filing of the Form
10-Q that reports the discontinued operation but before or simultaneously with
the filing of the new registration statement.
Example 8-2
Registration Statement After Presentation of a Component as a Discontinued Operation
Facts
Company A, an SEC registrant, files its Form 10-K for the year ended December
31, 20X5, on February 28, 20X6. On June 1, 20X6, A
determines that it has met the requirements for
presenting Component B as a discontinued operation.
Company A files its Form 10-Q for the quarter ended June
30, 20X6, on July 28, 20X6, and presents B as a
discontinued operation for the interim periods
presented.
Example 1
Company A files a new registration statement on September 15, 20X6. Company A
must either (1) include
financial statements and other affected financial
information that present B as a discontinued operation
for all periods presented in A’s December 31, 20X5, Form
10-K or (2) incorporate by
reference a previously filed Form 8-K that
contains financial statements and other affected
financial information that present B as a discontinued
operation for all periods presented in A’s December 31,
20X5, Form 10-K.
Example 2
Company A files a new registration statement on July 10, 20X6, instead of
September 15, 20X6, before it files the Form 10-Q
reporting B as a discontinued operation. Company A is
not required (or permitted4) to (1) include in its registration statement
updated financial statements that present B as a
discontinued operation or (2) incorporate by reference a
Form 8-K containing updated financial statements and
other affected financial information that present B as a
discontinued operation. However, A should consult with
its legal counsel and independent accountants regarding
the appropriate disclosure to provide in the new
registration statement, including the pro forma
considerations discussed in Section 8.5.
8.3.2 Form S-8
The requirements for a Form S-8 are addressed in Question 126.40 of the SEC staff’s
C&DIs on Securities Act Forms:
C&DIs — Securities Act Forms
Question: After
its Form 10-K is filed, a registrant has a change in
accounting principles (or changes in segment
presentation or discontinued operations), which will
cause the financial presentation in its subsequent Form
10-Qs to differ from that in its most recent Form 10-K.
In this situation, Item 11(b)(ii) of Form S-3 would
require the annual audited financial statements filed in
the Form 10-K to be restated to reflect the change in
accounting principles (or changes in segment
presentation or discontinued operations). Would General
Instruction G.2 of Form S-8, which requires that
“material changes in the registrant’s affairs” be
disclosed in the registration statement, also require
such restatement?
Answer: Not
necessarily. Form S-8 does not contain express language
similar to Item 11(b)(ii) of Form S-3, requiring the
restatement of financial statements to reflect specified
events. The fact that financial statements eventually
will be retroactively restated does not necessarily mean
that there are “material changes in the registrant’s
affairs,” thereby requiring the financial statements to
be restated for inclusion, or incorporation by
reference, in a Form S-8. In other words, financial
statements for which Item 11(b)(ii) of Form S-3 would
require restatement may not necessarily need to be
restated for incorporation by reference in a Form S-8.
The registrant is responsible for determining if there
has been a material change and, if so, the related
information that is required to be disclosed in a Form
S-8. Correspondingly, it is the auditor’s responsibility
to determine if it will issue a consent to use of its
report in a Form S-8 if there has been a change in the
financial statements in a subsequent Form 10-Q and the
financial statements in the Form 10-K have not been
retroactively restated.
Accordingly, with respect to a Form S-8, a registrant is generally not required
to update its previously issued financial statements to reflect a discontinued
operation unless it constitutes a “material change in the registrant’s
affairs.”
8.3.3 Prospectus Supplements to Registration Statements That Currently Are Effective
For currently effective registration statements (e.g., an existing Form S-3) upon which a registrant wishes to draw down or issue securities, the registrant may use a prospectus supplement. Paragraph 13110.2 of the FRM indicates that “a prospectus supplement used to update a delayed or continuous offering registered on Form S-3 (e.g., a shelf takedown) is not subject to the Item 11(b)(ii) updating requirements.” Rather, the prospectus must be updated “in accordance with S-K 512(a) with respect to any fundamental change.”
The issuance of a prospectus supplement does not constitute a reissuance of the
financial statements included in or incorporated into the effective registration
statement. Management, in consultation with legal counsel, should determine
whether the retrospective presentation of a discontinued operation constitutes a
fundamental change. (For more information, see SEC Regulation S-K, Item 512(a).)
If the registrant and its legal counsel determine that the retrospective
adjustment to present a discontinued operation is a fundamental change, updated
financial statements and other affected financial information should be filed on
Form 8-K or included in the registration statement, as described above. If the
registrant and its legal counsel determine that the retrospective adjustment for
a discontinued operation is not a fundamental change, the financial statements
do not need to be updated, but the registrant should consult with its legal
counsel and independent accountants regarding the appropriate disclosure to
provide in the prospectus supplement. In addition, all post-effective amendments
are considered “new filings” and are subject to the guidance discussed in Section 8.3.1.
8.3.4 Nonpublic Offerings
Financial statements subject to retrospective changes may also be included in or
incorporated into a nonpublic offering, such as a private placement pursuant to SEC
Regulation D or Rule 144A of the Securities Act. We believe that the inclusion of
the financial statements in the nonpublic offering constitutes a reissuance (as
discussed in ASC 855-10-25-4) and that entities are therefore typically required
under U.S. GAAP to update the financial statements for prior periods to reflect the
discontinued operation. Accordingly, the considerations related to updating the
financial statements for a discontinued operation would be similar to those
discussed in Section 8.3.1. We
believe that when the financial statements are incorporated by reference into a
nonpublic offering, the considerations related to updating the financial statements
for the retrospective change would be the same as those for prospectus supplements
to registration statements that are currently effective, which are discussed in
Section 8.3.3.
Footnotes
2
SEC registrants that file a proxy statement with the SEC
should also refer to this guidance. For a Schedule TO (used to file
tender offers), see paragraph 14310.3 of the
FRM.
3
See the highlights of the June 23,
2009, CAQ SEC Regulations Committee joint meeting with the SEC
staff.
4
See footnote 3.
8.4 Form 8-K Reporting Obligations
SEC registrants are required to periodically file current reports on Form 8-K to
inform investors of certain events. Form 8-K, Item 2.01, requires a registrant to
file a Form 8-K within four business days after a consummated5 disposition of (1) a significant amount of assets or (2) a business that is
significant. In accordance with Instruction 2 of Item 2.01 of Form 8-K, “[t]he term
disposition includes every sale, disposition by lease, exchange, merger,
consolidation, mortgage, assignment or hypothecation of assets, whether for the
benefit of creditors or otherwise, abandonment, destruction, or other disposition.”
In addition, a registrant must also consider the Form 8-K reporting obligations when
it contributes assets or a business in exchange for an equity interest in a joint
venture. (For more information, see Deloitte’s Roadmap SEC Reporting Considerations for Business
Acquisitions.) Further, when either a subsidiary is
deconsolidated or a group of assets is derecognized, SEC registrants may be required
to report the deconsolidation or derecognition on a Form 8-K and provide pro forma
financial information that gives effect to the deconsolidation or derecognition.
(For more information, see paragraph 2110.1 of the FRM and Section F.4 of Deloitte’s Roadmap Consolidation — Identifying a
Controlling Financial Interest).
The nature of the registrant’s disclosures depends on whether the disposed-of
operations (1) represent a business for SEC reporting purposes or (2) are
significant. The definition of a business in SEC Regulation S-X, Rule 11-01(d), for
SEC reporting purposes differs from the definition of a business in ASC 805-10 for
U.S. GAAP accounting purposes. Accordingly, the registrant must first perform an
evaluation under Rule 11-01(d), to determine its SEC reporting requirement. For more
information about the definition of a business for SEC reporting purposes, see
Section 2.1 of
Deloitte’s Roadmap SEC
Reporting Considerations for Business Acquisitions.
Form 8-K, Item 2.01, Instruction 4, states, in part:
An acquisition or disposition shall be deemed to involve a significant amount of assets:
(i) if the registrant’s and its other subsidiaries’ equity in the net book value of such assets or the amount
paid or received for the assets upon such acquisition or disposition exceeded 10% of the total assets of
the registrant and its consolidated subsidiaries; or
(ii) if it involved a business (see 17 CFR 210.11-01(d)) that is significant (see 17 CFR 210.11-01(b)).
If the disposed-of operations do not meet the definition of a business for SEC
reporting purposes, the disposal should be regarded as an asset disposition and
reported under Form 8-K, Item 2.01, if it exceeds the 10 percent threshold specified
in the two significance tests in Instruction 4.
If the disposed-of operations meet the definition of a business for SEC
reporting purposes, the disposal should be regarded as a business disposition, if
significant. With respect to condition (ii) in Instruction 4 of Form 8-K, Item 2.01,
the disposition of a business is significant if any of the results of the three
significance tests in Rule 1-02(w) (i.e., the asset, income [both the income
component and the revenue component], or investment test), exceed 20 percent. The
following is a more detailed description of the three tests:
- Asset test — The total assets of the disposed-of business are compared with the registrant’s total assets on the basis of the most recent predisposal annual financial statements.
- Income test — The income test consists of an income component and a
revenue component:
- Income component — The pretax income of the disposed-of business is compared with the registrant’s pretax income from continuing operations on the basis of the most recent predisposal annual financial statements.
- Revenue component — If both the disposed-of business and the registrant acquiree have material revenue in each of the two most recently completed fiscal years, the revenue component is calculated by comparing the revenue of the disposed-of business with the registrant’s revenue on the basis of the most recent predisposal annual financial statements. If either the registrant or the disposed-of business does not have material revenue for each of the two most recently completed fiscal years, only the income component should be used.
- Investment test — The fair value of consideration received, including contingent consideration, is compared with the aggregate worldwide market value of the registrant’s common equity. The aggregate worldwide market value is based on the average of the last five trading days of the registrant’s most recently completed month-end before the earlier of (1) the registrant’s announcement date or (2) the agreement date of the disposition. If the registrant has no aggregate worldwide market value (e.g., when common equity is not publicly traded, including in an IPO), total assets should be used. In the case of a spin-off or split-off, when no consideration is received, the carrying value of the disposed-of business should be used to determine significance in accordance with the investment test.
In addition to the requirement to disclose — under Form 8-K, Item 2.01 — the
date of completion of the transaction, a brief description of the assets involved,
and the identification and nature of the relationship of the person(s) to whom the
assets were sold, Form 8-K, Item 9.01, requires registrants to provide, in
accordance with SEC Regulation S-X, Article 11, pro forma financial information that
reflects a material asset disposition or significant business disposition (see Section 8.5). The Form 8-K,
including the pro forma financial information, must be filed within four business
days after the consummation6 of the disposition. The 71-day extension in Item 9.01 that is available for
acquisitions is not available for a disposition, as indicated in Question 129.01 of the
SEC staff’s C&DIs on Exchange Act Form 8-K:
Question: Is the automatic 71-day extension of time in
Item 9.01 of Form 8-K available with respect to dispositions?
Answer: No. The automatic 71-day
extension of time in Item 9.01 of Form 8-K is available only with respect to
acquisitions, not dispositions. The Division’s Office of the Chief Accountant
will continue to address questions regarding dispositions on a case-by-case
basis.
8.4.1 Flowchart Illustrating the Form 8-K Reporting Obligations for a Significant Disposition
The flowchart below outlines considerations related to the reporting obligations a registrant could have
under Form 8-K, Item 2.01, when it completes a disposition. In the flowchart, it is assumed that an entity
is required to file a Form 8-K to report the disposition. If the requirements for filing under Form 8-K,
Item 2.01, are met, pro forma financial information prepared under Form 8-K, Item 9.01, must be filed
within four business days of the consummation of the disposition.
7
The definition of a business for SEC purposes is
outlined in SEC Regulation S-X, Rule 11-01(d). This definition can differ from the definition in
accounting literature, including that in ASC 805-10.
8
Under Rule 11-01(b), a disposed-of business is
significant if the business to be disposed of exceeds the 20 percent
level of significance for any of the significance tests in
Regulation S-X, Rule 1-02(w).
9
Instruction 4(i) of Item 2.01 indicates that if
either of the following exceeds 10 percent of the registrant’s
consolidated assets, the disposition of assets would be considered
significant: (1) the equity in the net book value of the assets or
(2) the amount received for the assets upon disposition.
Footnotes
5
A Form 8-K may also be required by Item 1.01
when a registrant has entered into a material definitive agreement for a
disposition (e.g., when it executes a contract to dispose of the assets or
business). An Item 1.01 Form 8-K is generally filed earlier than the Item
2.01 Form 8-K, which a registrant is not required to file until the
disposition is consummated. Since Item 2.01 triggers a requirement to
provide financial statements in accordance with Item 9.01 (typically pro
forma financial statements for a disposition), such financial statements are
not required in an Item 1.01 Form 8-K. Registrants should consult with their
legal advisers regarding these requirements.
6
See footnote 5.
7
The definition of a business for SEC purposes is
outlined in SEC Regulation S-X, Rule 11-01(d). This definition can differ from the definition in
accounting literature, including that in ASC 805-10.
8
Under Rule 11-01(b), a disposed-of business is
significant if the business to be disposed of exceeds the 20 percent
level of significance for any of the significance tests in
Regulation S-X, Rule 1-02(w).
9
Instruction 4(i) of Item 2.01 indicates that if
either of the following exceeds 10 percent of the registrant’s
consolidated assets, the disposition of assets would be considered
significant: (1) the equity in the net book value of the assets or
(2) the amount received for the assets upon disposition.
8.5 Pro Forma Financial Information Under Article 11
The objective of providing pro forma financial information is to enable
investors to understand and evaluate the impact of a transaction by showing how that
specific transaction (or group of transactions) might have affected the registrant’s
historical financial position and results of operations had the transaction occurred
at an earlier date. SEC Regulation S-X, Article 11, which establishes the
requirements for pro forma information, lists several circumstances in which a
registrant may be required to provide pro forma financial information, including
when the disposition of a significant portion of a business has occurred or is
probable or when other events have occurred for which pro forma information would be
material to investors. Pro forma financial information for a significant disposition
may be required in a registration statement, proxy statement, or Form 8-K.
8.5.1 Pro Forma Financial Information for a Consummated or Probable Disposition
Pro forma financial information for a significant disposition may be required in
a registration statement or proxy statement when a disposition has been
consummated or is probable and the historical financial
statements do not yet reflect the transaction. Further, when a significant
disposition has been consummated and is not yet reflected in the historical
financial statements, pro forma information is required to be provided in Form
8-K, Item 2.01. If a disposal is presented as a discontinued operation in the
historical financial statements before the disposition is consummated (i.e., the
held-for-sale and discontinued-operations criteria are met), certain pro forma
financial information may not be required. Further, pro forma financial
information for the disposition may be required even if the disposed-of
operations do not meet the discontinued-operations criteria.
Example 8-3
Pro Forma Financial Information for a Disposal That Has Occurred
Example 1
Company A, an SEC registrant, announced on April 30, 20X5, that it intends to spin off Component B to its shareholders. Company A determines that B will meet the criteria for presentation as a discontinued operation when the spin-off occurs. The spin-off is completed on November 30, 20X5, and A must file a Form 8-K to report the significant business disposition within four business days. Pro forma financial information reflecting B as a discontinued operation must be provided since A’s historical financial statements do not yet reflect the disposal of B (i.e., B is not presented as a discontinued operation in A’s historical financial statements at the time the Form 8-K must be filed).
Example 2
On December 15, 20X5, Company A, an SEC registrant, enters into an agreement to
sell Component B and determines that B will meet the
criteria for presentation as a discontinued operation in
A’s December 31, 20X5, financial statements. Company A
files its 20X5 Form 10-K on February 25, 20X6, and
adjusts its financial statements to reflect the
discontinued operation for all periods presented. The
disposal of B is completed on May 1, 20X6, and A must
file a Form 8-K to report the significant business
disposition within four business days. However, because
A’s historical financial statements already present B’s
operations as a discontinued operation in its Form 10-K,
A is not required to provide pro forma income statements
in the Form 8-K.
8.5.2 Form and Content of Pro Forma Financial Information
For the disposition of a significant business, a pro forma balance
sheet should be presented for only the most recent balance sheet required by SEC
Regulation S-X, Rule 3-01 (i.e., one pro forma balance sheet as of the end of the
fiscal year or the subsequent interim period, whichever is later). In cases in which
there are only a few pro forma adjustments and such adjustments are easily
understood, a registrant may also consider including a narrative discussion in lieu
of the pro forma balance sheet reflecting the effects of the disposition. Pro forma
income statements generally should be presented for only the most recent fiscal year
and interim period that must be presented. However, SEC Regulation S-X, Rule
11-02(c)(2)(ii), states, “For transactions required to be accounted for under U.S.
GAAP or, as applicable, IFRS-IASB by retrospectively revising the historical
statements of comprehensive income (e.g., combination of entities under common
control and discontinued operations), pro forma statements
of comprehensive income must be filed for all periods for which historical financial
statements of the registrant are required” (emphasis added). Accordingly, if a
disposal meets the discontinued-operations criteria in ASC 205-20, three years of pro forma income statements must be
presented. However, if the disposition does not meet these criteria, only one year
of pro forma income statement is required. The appropriate subsequent interim
periods in the current year are required in both scenarios.
The pro forma balance sheet should be prepared as if the disposal
took place on the balance sheet date. In preparing the pro forma income
statement(s), an entity should assume that the disposal took place at the beginning
of the earliest period presented. The pro forma adjustments for the disposal are
limited to adjustments that reflect the accounting for the transaction in accordance
with U.S. GAAP or IFRS® Accounting Standards, as applicable. For
dispositions, the adjustments may reflect the disposal of assets and related
impacts. Pro forma information for the income statement should only be presented
through continuing operations.
In addition to the required adjustments noted above, registrants may
present, in the explanatory notes to the pro forma financial information,
management’s adjustments, which reflect synergies and dis-synergies identified by
management when evaluating whether to undertake a disposition. Management’s
adjustments may also provide insight into the potential effects of the disposition
and the plans that management expects to execute after the disposition (which may
include forward-looking information). To enable investors to separate the accounting
impact of the transaction from the impact of management’s plans after the
transaction, an entity can only present management’s adjustments in “the explanatory
notes . . . in the form of reconciliations of pro forma net income . . . and the
related pro forma earnings per share data . . . to such amounts after giving effect
to Management’s Adjustments.”
For a significant asset disposition in which such information would
be material to investors, the registrant may consider including limited pro forma
balance sheet information reflecting the effects of the disposition (or, for
example, a narrative discussion if adjustments are easily understood).
As noted in Section
8.4, registrants should be mindful of the requirement to provide pro
forma information for a significant disposition in the Form 8-K that must be filed
four business days after the disposition has occurred.
Complying with this requirement can be particularly challenging when the registrant
must provide three years of pro forma financial information reflecting the
discontinued operation. As a reminder, the automatic 71-day extension in Form 8-K,
Item 9.01, is not available for a significant disposition.
8.6 Impact of Reporting a Discontinued Operation on Financial Information About Other Entities
When a component meets the discontinued-operations criteria in ASC 205-20, a
registrant must consider the impact this may have on its requirement
to provide financial statements or financial information about other
entities (e.g., acquired businesses, equity method investees,
guarantors, and issuers of guaranteed securities).
8.6.1 SEC Regulation S-X, Rule 3-05: Financial Statements of Businesses Acquired or to Be Acquired
Under SEC Regulation S-X, Rule 3-05, SEC registrants are required to evaluate
the significance of an acquired or to be acquired business
(acquiree) in accordance with the tests in SEC Regulation
S-X, Rule 1-02(w) (i.e., the asset, income, or investment
test), to determine whether the acquiree’s financial
statements are required. Because the income test is based on
a measure of income and revenue (after intercompany
eliminations) from continuing operations, the
reporting of a discontinued operation could affect the
results of the significance test.
As discussed in Section
8.3, a company may be required, or may elect, to file its audited annual
financial statements that give retrospective effect to a discontinued operation.
For businesses acquired after the date on which the retrospectively adjusted
financial statements are filed, registrants must use those retrospectively
revised financial statements when performing the significance tests.
Paragraph
2025.1 of the FRM further indicates that registrants must
also use these adjusted financial statements to evaluate (1) probable
acquisitions and (2) the “[a]ggregate impact of all individually insignificant
businesses that have occurred since the end of the most recently completed
fiscal year.”
Note 1 to paragraph 2025.1 of the FRM indicates that for businesses acquired on or before the date on which the retrospectively adjusted financial statements are filed, significance may be measured on the basis of “either (A) the registrant’s audited financial statements for its most recently completed fiscal year that were filed prior to the retrospectively adjusted financial statements giving effect to the discontinued operation or (B) the registrant’s filed financial statements for the most recently completed fiscal year that reflect retrospective application of the discontinued operation.” This paragraph goes on to state that a “registrant must consistently use [either option A or B] to measure significance of all individual acquisitions completed on or before the date the retrospectively adjusted financial statements are filed.”
8.6.2 SEC Regulation S-X, Rules 3-09 and 4-08(g): Financial Statements and Summarized Financial Information for Equity Method Investments
Under SEC Regulation S-X, Rules 3-09 and 4-08(g), SEC registrants are required
to evaluate the significance of an equity method investee by
performing the tests in SEC Regulation S-X, Rule 1-02(w)
(i.e., the asset, income, or investment test), to determine
whether they must provide the investee’s (1) financial
statements, (2) summarized financial information, or (3)
both. Because the calculation for the income test is based
on a measure of income and revenue (after intercompany
eliminations) from continuing
operations, the reporting of a discontinued operation could
affect the results of the significance test.
The prescribed significance tests are performed annually in connection with the
filing of a Form 10-K (i.e., at the end of the registrant’s fiscal year).
Accordingly, significance is not remeasured when updated financial statements
that reflect retrospective adjustments are filed in a Form 8-K (or included in
or incorporated into a registration statement). However, when a registrant files
its next Form 10-K, it should be mindful that significance should be measured
for each annual period presented in the financial statements on the basis of
amounts that were retrospectively adjusted. Consequently, as a result of
retrospective adjustments for discontinued operations, a previously
insignificant equity method investee may become significant and a registrant may
be required to file the investee’s financial statements (or summarized
information under Rule 4-08(g)) in the registrant’s next Form 10-K — even if the
registrant was not required to provide these items in a prior Form 10-K. See
paragraph
2410.8 of the FRM for additional guidance.
Example 8-4
Significance of an Equity Method Investee When a Discontinued Operation Is Reported
Company A, an SEC registrant, disposed of Component B on November 30, 20X5. Historically, A has not been required to provide separate financial statements for Equity Method Investment C because C has not met the significance thresholds. While preparing its Form 10-K for the year ended December 31, 20X5, which retrospectively reflects B as a discontinued operation for all periods presented, A determines that C is now more than 20 percent significant to each of the three years ended December 31, 20X5, as a result of the retrospective presentation of discontinued operations. Company A must file C’s audited financial statements as of December 31, 20X5, and December 31, 20X4, and for the three years ended December 31, 20X5.
8.6.3 SEC Regulation S-X, Rule 3-10: Financial Statements of Guarantors and Issuers of Guaranteed Securities
Registrants that have registered debt with subsidiary or parent guarantees may
make use of certain accommodations in SEC Regulation S-X, Rule 3-10, and provide
summarized financial information in lieu of separate financial statements for
guarantor subsidiaries.
When a registrant disposes of a guarantor subsidiary, that subsidiary is
typically released from its guarantee. Changes in the
composition of guarantors and nonguarantors (e.g., a change
in a subsidiary designated as guarantor to one designated as
nonguarantor) may affect the summarized financial
information. For further details, see Section
2.3.2.4.2 of Deloitte’s Roadmap SEC
Reporting Considerations for Guarantees and
Collateralizations.
8.7 “To-Be-Issued” Accountant’s Report
In anticipation of an IPO, an entity may enter into a transaction to dispose of
a component or group of components that meets the discontinued-operations criteria
in ASC 205-20. Although the disposal may occur after the date of the entity’s most
recent balance sheet included in the registrant’s financial statements (in which
case presentation as a discontinued operation would typically be precluded under
U.S. GAAP), in certain circumstances the registrant may be able to present the
transaction retrospectively in the entity’s financial statements and include a
“to-be-issued” auditor’s report on those financial statements. See Sections 3.8 and 5.6.2.1 of Deloitte’s Roadmap
Initial Public
Offerings for further discussion of “to-be-issued” auditor’s
reports.
Specifically in relation to discontinued operations, the
highlights of the June 25, 2014, CAQ SEC Regulations Committee
joint meeting with the SEC staff discuss the following:
The FRM
guidance cites specific examples of when such a draft report may be used but
indicates that use of a draft report is not limited to these events. The
Committee asked the staff whether a registration statement including a
to-be-issued audit report and the related retrospectively revised financial
statements might be reviewed in a situation where a registrant has a component
that qualifies as a discontinued operation before an initial registration
statement is filed but after the date of the latest balance sheet included in
the initial filing.
In order to qualify, the following
must be completed prior to the initial filing: 1) the
disposal of the discontinued operation has occurred; 2) the audit of the
financial statements, including the retrospective revision; and 3) registrant consultation with the appropriate Assistant Director
group. [Emphasis added]
In addition to meeting all the requirements discussed by the SEC Regulations
Committee above, a pre-effective amendment to the registration statement must
contain (1) updated financial statements for a period that includes the disposal
date and (2) an unrestricted accountant’s report. That is, the registration
statement cannot be declared effective until the to-be-issued report is removed and
the accountant’s report is finalized. Entities are encouraged to consult with their
independent accountants if they believe that they meet the requirements noted
above.
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:
-
The adequacy and frequency of the registrant’s asset impairment tests, including the date of its most recent test.
-
The factors or indicators (or both) used by management to evaluate whether the carrying value of other long-lived assets may not be recoverable.
-
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.
-
The registrant’s conclusions regarding its asset groupings.
-
The timing of the impairment, especially if events that could result in an impairment had occurred in periods before the registrant recorded the impairment.
-
The types of events that could result in impairments.
-
In the critical accounting estimates section of MD&A, the registrant’s process for assessing impairments.
-
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.
Appendix A — Glossary of Selected Terms in ASC 205-20, ASC 360-10, and ASC 805-10
Appendix A — Glossary of Selected Terms in ASC 205-20, ASC 360-10, and ASC 805-10
ASC
205-20,
ASC
360-10,
and ASC 805-10 — Selected Glossary Terms
Asset Group
An asset group is the unit of accounting for
a long-lived asset or assets to be held and used, which
represents the lowest level for which identifiable cash
flows are largely independent of the cash flows of other
groups of assets and liabilities.
Business
Paragraphs 805-10-55-3A through 55-6 and
805-10-55-8 through 55-9 define what is considered a
business.
Component of an
Entity
A component of an entity comprises
operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the
rest of the entity. A component of an entity may be a
reportable segment or an operating segment, a reporting
unit, a subsidiary, or an asset group.
Corporate Joint Venture
A corporation owned and operated by a small group of entities
(the joint venturers) as a separate and specific business or
project for the mutual benefit of the members of the group.
A government may also be a member of the group. The purpose
of a corporate joint venture frequently is to share risks
and rewards in developing a new market, product or
technology; to combine complementary technological
knowledge; or to pool resources in developing production or
other facilities. A corporate joint venture also usually
provides an arrangement under which each joint venturer may
participate, directly or indirectly, in the overall
management of the joint venture. Joint venturers thus have
an interest or relationship other than as passive investors.
An entity that is a subsidiary of one of the joint venturers
is not a corporate joint venture. The ownership of a
corporate joint venture seldom changes, and its stock is
usually not traded publicly. A noncontrolling interest held
by public ownership, however, does not preclude a
corporation from being a corporate joint venture.
Disposal Group
A disposal group for a long-lived asset or
assets to be disposed of by sale or otherwise represents
assets to be disposed of together as a group in a single
transaction and liabilities directly associated with those
assets that will be transferred in the transaction. A
disposal group may include a discontinued operation along
with other assets and liabilities that are not part of the
discontinued operation.
Firm Purchase
Commitment
A firm purchase commitment is an agreement
with an unrelated party, binding on both parties and usually
legally enforceable, that meets both of the following
conditions:
-
It specifies all significant terms, including the price and timing of the transaction.
-
It includes a disincentive for nonperformance that is sufficiently large to make performance probable.
Joint Venture
An entity owned and operated by a small group of businesses
(the joint venturers) as a separate and specific business or
project for the mutual benefit of the members of the group.
A government may also be a member of the group. The purpose
of a joint venture frequently is to share risks and rewards
in developing a new market, product, or technology; to
combine complementary technological knowledge; or to pool
resources in developing production or other facilities. A
joint venture also usually provides an arrangement under
which each joint venturer may participate, directly or
indirectly, in the overall management of the joint venture.
Joint venturers thus have an interest or relationship other
than as passive investors. An entity that is a subsidiary of
one of the joint venturers is not a joint venture. The
ownership of a joint venture seldom changes, and its equity
interests usually are not traded publicly. A minority public
ownership, however, does not preclude an entity from being a
joint venture. As distinguished from a corporate joint
venture, a joint venture is not limited to corporate
entities.
Nonprofit
Activity
An integrated set of activities and assets
that is capable of being conducted and managed for the
purpose of providing benefits, other than goods or services
at a profit or profit equivalent, as a fulfillment of an
entity’s purpose or mission (for example, goods or services
to beneficiaries, customers, or members). As with a
not-for-profit entity, a nonprofit activity possesses
characteristics that distinguish it from a business or a
for-profit business entity.
Not-for-Profit
Entity
An entity that possesses the following
characteristics, in varying degrees, that distinguish it
from a business entity:
-
Contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return
-
Operating purposes other than to provide goods or services at a profit
-
Absence of ownership interests like those of business entities.
Entities that clearly fall outside this
definition include the following:
-
All investor-owned entities
-
Entities that provide dividends, lower costs, or other economic benefits directly and proportionately to their owners, members, or participants, such as mutual insurance entities, credit unions, farm and rural electric cooperatives, and employee benefit plans.
Operating
Segment
A component of a public entity. See Section
280-10-50 for additional guidance on the definition of an
operating segment.
Probable
The future event or events are likely to
occur.
Public Business
Entity
A public business entity is a business
entity meeting any one of the criteria below. Neither a
not-for-profit entity nor an employee benefit plan is a
business entity.
-
It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
-
It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
-
It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
-
It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
-
It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including notes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.
An entity may meet the definition of a
public business entity solely because its financial
statements or financial information is included in another
entity’s filing with the SEC. In that case, the entity is
only a public business entity for purposes of financial
statements that are filed or furnished with the SEC.
Reporting Unit
The level of reporting at which goodwill is
tested for impairment. A reporting unit is an operating
segment or one level below an operating segment (also known
as a component).
Settlement of a Pension
or Postretirement Benefit Obligation
A transaction that is an irrevocable action,
relieves the employer (or the plan) of primary
responsibility for a pension or postretirement benefit
obligation, and eliminates significant risks related to the
obligation and the assets used to effect the settlement.
Appendix B — Titles of Standards and Other Literature
Appendix B — Titles of Standards and Other Literature
FASB Literature
ASC Topics
ASC 205, Presentation of
Financial Statements
ASC 210, Balance Sheet
ASC 225, Income
Statement
ASC 270, Interim Reporting
ASC 275, Risks and Uncertainties
ASC 280, Segment
Reporting
ASC 310,
Receivables
ASC 320, Investments —
Debt Securities
ASC 321, Investments — Equity
Securities
ASC 323, Investments —
Equity Method and Joint Ventures
ASC 326, Financial Instruments — Credit
Losses
ASC 330, Inventory
ASC 340, Other Assets and Deferred
Costs
ASC 350, Intangibles —
Goodwill and Other
ASC 360, Property, Plant,
and Equipment
ASC 420, Exit or Disposal
Cost Obligations
ASC 450,
Contingencies
ASC 460,
Guarantees
ASC 606, Revenue From
Contracts With Customers
ASC 610, Other
Income
ASC 715, Compensation —
Retirement Benefits
ASC 740, Income Taxes
ASC 805, Business
Combinations
ASC 810,
Consolidation
ASC 815, Derivatives and
Hedging
ASC 820, Fair Value
Measurement
ASC 830, Foreign Currency
Matters
ASC 835, Interest
ASC 840, Leases
ASC 842, Leases
ASC 845, Nonmonetary
Transactions
ASC 852, Reorganizations
ASC 855, Subsequent
Events
ASC 860, Transfers and
Servicing
ASC 920, Entertainment —
Broadcasters
ASC 922, Entertainment — Cable
Television
ASC 926, Entertainment — Films
ASC 928, Entertainment —
Music
ASC 930, Extractive Activities —
Mining
ASC 932, Extractive Activities — Oil and
Gas
ASC 944, Financial Services —
Insurance
ASC 948, Financial
Services — Mortgage Banking
ASC 958, Not-for-Profit
Entities
ASC 970, Real Estate — General
ASC 980, Regulated Operations
ASC 985, Software
ASUs
ASU 2014-08, Presentation
of Financial Statements (Topic 205) and Property, Plant, and Equipment
(Topic 360): Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity
ASU 2016-13, Financial
Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments
ASU 2016-20, Technical Corrections and
Improvements to Topic 606, Revenue From Contracts With Customers
ASU 2017-01, Business Combinations (Topic
805): Clarifying the Definition of a Business
ASU 2021-03, Intangibles
— Goodwill and Other (Topic 350): Accounting Alternative for Evaluating
Triggering Events
ASU 2023-05, Business
Combinations — Joint Venture Formations (Subtopic 805-60): Recognition
and Initial Measurement
IFRS Literature
IAS 36, Impairment of
Assets
IFRS 5, Non-current Assets
Held for Sale and Discontinued Operations
SEC Literature
Final Rule Release
No. 33-10532, Disclosure
Update and Simplification
Form 8-K
Item 1.01, “Entry Into a
Material Definitive Agreement”
Item 2.01, “Completion of
Acquisition or Disposition of Assets”
Item 2.06, “Material Impairments”
Item 9.01, “Financial Statements
and Exhibits”
FRM
No. Topic 2, “Other
Financial Statements Required”
No. Topic 9, “Management’s
Discussion and Analysis of Financial Position and Results of Operations
(MD&A)”
No. Topic 13, “Effects of
Subsequent Events on Financial Statements Required in Filings”
No. Topic 14, “Tender
Offers”
Regulation S-K
Item 302, “Supplementary
Financial Information”
Item 303, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”
Item 512, “Registration
Statement and Prospectus Provisions; Undertakings”
Regulation S-X
Rule 1-02(w), “Definitions
of Terms Used in Regulation S-X (17 CFR Part 210); Significant
Subsidiary”
Rule 3-01, “General
Instructions as to Financial Statements; Consolidated Balance Sheets”
Rule 3-05, “Financial
Statements of Businesses Acquired or to Be Acquired”
Rule 3-09, “Separate
Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less
Owned Persons”
Rule 3-10, “Financial
Statements of Guarantors and Issuers of Guaranteed Securities Registered or
Being Registered”
Rule 3-15, “Special
Provisions as to Real Estate Investment Trusts”
Rule 4-08(g), “General Notes
to Financial Statements; Summarized Financial Information of Subsidiaries
Not Consolidated and 50 Percent or Less Owned Persons”
Rule 4-10, “Financial
Accounting and Reporting for Oil and Gas Producing Activities Pursuant to
the Federal Securities Laws and the Energy Policy and Conservation Act of
1975”
Rule 5-02(13), “Commercial
and Industrial Companies; Balance Sheets; Property, Plant and Equipment”
Article 11, “Pro Forma
Financial Information”
-
Rule 11-01, “Presentation Requirements”
-
Rule 11-02, “Preparation Requirements”
SAB Topics
No. 5, “Miscellaneous
Accounting”
-
No. 5.P.3, “Restructuring Charges; Income Statement Presentation of Restructuring Charges”
-
No. 5.Z.5, “Accounting and Disclosure Regarding Discontinued Operations; Classification and Disclosure of Contingencies Relating to Discontinued Operations”
-
No. 5.Z.7, “Accounting and Disclosure Regarding Discontinued Operations; Accounting for the Spin-Off of a Subsidiary”
-
No. 5.CC, “Impairments”
Securities Act of 1933
Rule 144A, “Private Resales of
Securities to Institutions”
Superseded Literature
Accounting Principles Board (APB) Opinion
APB 30, Reporting the Results
of Operations — Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions
EITF Abstracts
Issue No. 01-2, “Interpretations of APB Opinion
No. 29”
Issue No. 01-10, “Accounting for
the Impact of the Terrorist Attacks of September 11, 2001”
Topic No. D-104, “Clarification of Transition Guidance in Paragraph 51 of FASB Statement No. 144”
FASB Statements
No. 5, Accounting for
Contingencies
No. 52, Foreign Currency
Translation
No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets
Appendix C — Abbreviations
Appendix C — Abbreviations
Abbreviation
|
Description
|
---|---|
AICPA
|
American Institute of Certified Public
Accountants
|
AOCI
|
accumulated other comprehensive income
|
APB
|
Accounting Principles Board
|
AR
|
accounts receivable
|
ASC
|
FASB Accounting Standards Codification
|
ASU
|
FASB Accounting Standards Update
|
BC
|
Basis for Conclusions
|
C&DI
|
SEC’s Compliance and Disclosure
Interpretation
|
CAQ
|
Center for Audit Quality
|
CEO
|
chief executive officer
|
CFR
|
Code of Federal Regulations
|
CGU
|
cash-generating unit
|
CTA
|
cumulative translation adjustment
|
DUSTR
|
SEC disclosure update and simplification
technical release
|
EBITDA
|
earnings before income taxes, depreciation,
and amortization
|
EDGAR
|
SEC’s Electronic Data Gathering, Analysis,
and Retrieval system
|
EITF
|
Emerging Issues Task Force
|
EPS
|
earnings per share
|
Exchange Act
|
Securities Exchange Act of 1934
|
FASB
|
Financial Accounting Standards Board
|
FCC
|
Federal Communications Commission
|
FRM
|
SEC Financial Reporting Manual
|
FTC
|
Federal Trade Commission
|
GAAP
|
generally accepted accounting principles
|
IT
|
information technology
|
MD&A
|
Management’s Discussion and Analysis
|
NFP |
not-for-profit (entity)
|
PCAOB
|
Public Company Accounting Oversight
Board
|
PP&E
|
property, plant, and equipment
|
REIT
|
real estate investment trust
|
ROU
|
right of use
|
SAB
|
SEC Staff Accounting Bulletin
|
SEC
|
U.S. Securities and Exchange Commission
|
Securities Act
|
Securities Act of 1933
|
Appendix D — Roadmap Updates for 2024
Appendix D — Roadmap Updates for 2024
The tables below summarize the substantive
changes made in the 2024 edition of this Roadmap.
New Content
Section
|
Title
|
Description
|
---|---|---|
Non–Pro Rata Split-Off of a Segment
|
Addresses requirements related to a
nonreciprocal/pro rata distribution to shareholders.
| |
Reflecting a Successor’s Discontinued
Operations in the Predecessor Period
|
Discusses reflecting a successor’s
discontinued operations in the predecessor period.
|
Amended Content
Section
|
Title
|
Description
|
---|---|---|
Changes in Asset-Group Determinations
|
Adds Connecting the Dots on
considerations related to asset-group determinations in
the current economic environment.
| |
The Sale Is Probable and Is Expected to Be Complete
Within One Year
|
Removes guidance on meeting the sale requirements for a
sale-and-leaseback transaction under ASC 840.
| |
Order of Impairment Testing When a Disposal Group Is Held
for Sale
|
Adds Example 3-4 to illustrate the
allocation of goodwill from a reporting unit to a
disposal group.
| |
Changes to a Plan of Sale
|
Amends (1) guidance related to changes
to a plan of sale and (2) Example 3-7.
| |
Spin-Offs and Other Nonmonetary Exchanges Recorded at
Carrying Amount
|
Incorporates guidance related to the pro rata
distribution of a legal entity’s shares.
Adds Example 4-3 illustrating a pro
rata split-up of entities.
| |
Balance Sheet Presentation for Assets (Disposal Groups)
Classified as Held for Sale That Are Not Discontinued
Operations
|
Clarifies presentation of the assets and liabilities of a
disposal group classified as held for sale as current
and noncurrent.
| |
Income Statement Presentation for Real Estate Investment
Trusts
|
Removes guidance on the requirements before the release
of the SEC’s DUSTR, since REITs now must comply with the
requirements of ASC 360-10-45-5 after November 5,
2018.
| |
Disclosures for Disposals That Are Not Discontinued
Operations
|
Clarifies that the disclosure requirements for
held-and-used assets generally do not apply to disposal
groups that have been disposed of or are held for
sale.
| |
Disclosures for Individually Significant Assets (Disposal
Groups) That Are Not Discontinued Operations
|
Incorporates additional considerations
related to the evaluation of “individually significant”
disposals.
| |
Income Statement Presentation of Discontinued
Operations
|
Refers to Section 8.7 of Deloitte's
Roadmap Earnings per Share
for more information about how an entity accounts for
and presents EPS.
| |
Settlements and Curtailments of Employee Benefit Plan
Obligations
|
Adds discussion of employee benefit curtailments.
| |
Allocating Direct Expenses (but Not Indirect Expenses) to
Discontinued Operations
|
Includes additional examples of direct costs related to
discontinued operations.
| |
Overview of Disclosures About Discontinued Operations
|
Clarifies that the disclosure requirements for continuing
operations generally do not apply to discontinued
operations.
|