Impairments and Disposals of Long-Lived Assets and Discontinued Operations

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 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.

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.

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.

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).