On the Radar
Impairments and Disposals of Long-Lived Assets and
Discontinued Operations
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 bank failures or downgrades; businesses’ struggles to raise
capital; companies’ announcements of layoffs, broader restructuring plans,
impairments, and changes in customer behavior. As a result, the determinations
business leaders may need to make regarding fixed asset impairments and disposals
could be complex.
In evaluating whether they need to assess long-lived assets for impairment, financial
statement preparers should consider the current and potential effects of factors
such as interest rate increases, inflation, climate risk, and changes in the labor
market. Further, how these factors may affect cash flow and fair value estimates
used in impairment analysis should be considered. As businesses evolve in response
to these conditions, preparers may also need to make determinations related 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 following flowchart 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 assets (and liabilities) meet the
held-for-sale classification criteria or have been disposed of and (2) 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).
Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets
and Discontinued Operations
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
|
Christine
Mazor
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 212 436
6462
|
|
Matt
Himmelman
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 714 436
7277
|
For information about Deloitte’s
offerings on disposals of long-lived assets and discontinued operations, please
contact:
|
Steve Barta
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 415 783
6392
|
|
Jamie Davis
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 312 486
0303
|