Accounting resources for ASC 350, ASC 360, and IAS 36

Impairment of nonfinancial assets exists when the carrying amount of an asset exceeds its fair value. Identifying (and calculating) an impairment involves significant judgment and estimate, but it’s also important to understand that the related impairment requirements will depend on the type of asset.

Common nonfinancial assets include long-lived assets, intangible assets (both finite-lived and indefinite-lived), and goodwill. These are all required to be tested for impairment, which are governed by the following topics:

• Long-lived assets and finite-lived intangible assets*: Governed by ASC 360 (U.S. GAAP) and IAS 36 (IFRS)
• Indefinite-lived intangible assets and goodwill: Governed by ASC 350 and IAS 36

* Note that for the remainder of this topic page, we will only reference long-lived assets (and not separately discuss finite-lived intangible assets) because the impairment accounting is exactly the same!

We’ve published this topic page to discuss the various impairment accounting requirements for the three common types of nonfinancial assets. We’ve also highlighted accounting issues, differences between U.S. GAAP and IFRS, and links to our eLearning courses and various blog posts on impairment of nonfinancial assets.

Note that impairment of financial assets is covered in a separate topic page.

Welcome video

Accounting issues

The requirements for testing the impairment of nonfinancial assets (long-lived assets, indefinite-lived intangible assets, and goodwill) are all different; therefore, it’s important to know what guidance governs the type of nonfinancial asset you’re testing and when testing is required.

Impairment testing: Type and timing

Impairment of long-lived assets (typically PP&E) is governed by ASC 360-10:

• Long-lived assets are amortized and are only tested for impairment when an indicator of impairment is present (a “triggering event”)
• A triggering event is an event or change in circumstances that would more likely than not reduce the fair value of an asset below its carrying amount. ASC 360-10-35-21 lists examples of triggering events that may require an impairment test but note that this list is not all inclusive and judgment is required.

Impairment of indefinite-lived intangible assets is governed by ASC 350-30 and impairment of goodwill is governed by ASC 350-20:

• Both indefinite-lived intangible assets and goodwill are not amortized, and impairment testing is required to be performed on an annual basis (at a minimum)
• Note that these assets must be tested for impairment between annual tests if a triggering event occurs and the company believes the asset is impaired (i.e., fair value is less than carrying amount)
• ASC 350 provides example qualitative factors to consider whether an asset has been impaired in the interim; however, this is not an all-inclusive list and judgment is also required in assessing an interim impairment

Impairment testing: Level to test

Understanding the appropriate level to test for impairment is also important, and this will depend on the type of asset being tested.

Cash flows are integral to nearly all impairment tests. For example, companies need cash flows to determine whether long-lived assets are recoverable (i.e., undiscounted cash flows), but may also use an income approach (discounted cash flows) to estimate the fair value of those assets. But, the challenge is that cash flows are not always available for individual assets, so what do companies do?

Before a company can begin the process of estimating future cash flows, it must first determine the lowest level at which it can obtain identifiable future cash flow information. In most instances, an asset is used together with other assets to generate future cash flows. For example, consider a manufacturing facility. It is generally difficult to determine the cash flows associated with a particular machine, as the related cash flows are usually generated by the entire production line or production facility. This is also traditionally how management reviews its assets as well. If assets are used in conjunction with one another to generate a single cash flow, then grouping of these assets is required to assess whether the asset group has been impaired. Therefore, long-lived assets are generally tested at the asset group level but also can be tested at the individual asset level. There are several methodologies that can be utilized to determine asset groups, but judgment must be applied.

Indefinite-lived intangible assets are tested for impairment on an individual asset basis (i.e., they cannot be combined with other assets such as finite-lived intangibles or goodwill). Goodwill must be tested for impairment at the reporting unit level. A company is required to start at the operating segment level (as defined by ASC 280) and look to the level below (component) to identify reporting units; however, certain criteria must be met for a component to be classified as a reporting unit. The identification of reporting units has been scrutinized by the SEC for years, so it’s important to appropriately document the identification of your reporting units for goodwill impairment testing. 

Impairment testing: Measurement and recognition

The impairment tests are also different between ASC 360 and ASC 350:

Long-lived assets (ASC 360)

Impairment is tested using a two-step approach if a triggering event is identified:

Step 1: Recoverability test:

Step 2: Measurement of impairment:

The company must measure the fair value of the asset (or asset group) using an appropriate fair value technique (ASC 820) and compare the fair value to the carrying value of the asset (or asset group). If the fair value is greater than the carrying value there is no impairment! If the fair value is less than the carrying value, the difference in amounts represents the amount of the impairment charge and the asset (or asset group) is written down to the fair value. If the asset is part of an asset group, the impairment loss must be allocated to the various assets within the group in accordance with rules set out in ASC 360-10-35.

Indefinite-lived intangible assets and goodwill (ASC 350)

Impairment is tested on an annual basis (at a minimum) using a one-step, quantitative approach. However, an optional, qualitative assessment can be performed to determine whether the quantitative assessment is necessary.

Note that the following represents the steps for indefinite-lived intangible assets (for goodwill, you would replace “asset” with “reporting unit” because goodwill is tested at the reporting unit level):

For goodwill, if the fair value of a reporting unit is less than its fair carrying value, the impairment loss recognized is limited to the total amount of goodwill allocated to that reporting unit. Also note that all reporting units, including those with zero or negative carrying amounts, must apply the requirements of the quantitative test!

Order of impairment testing

The order of testing these various assets for impairment is important to ensure each asset is valued appropriately after consideration of impairment. When testing assets for impairment, a company must adhere to the following hierarchy:

1. Test the carrying amounts of any assets (such as accounts receivable, inventory, contract assets, and other financial assets) that are outside the scope of ASC 350 and ASC 360 to ensure the carrying amount is appropriate in accordance with applicable U.S. GAAP topics (these are typically the “more liquid” balance assets)
2. Indefinite-lived intangible assets
3. Long-lived assets and finite-lived intangible assets
4. Goodwill is tested last (this is easy to remember if you think of the concept of goodwill; it’s the “stuff” left over after the individually recognized items from a business combination are recorded)

Also, don’t forget that impairments from each step are recognized before performing next step!

Accounting differences: ASC 350 and ASC 360 vs. IAS 36

U.S. GAAP (ASC 350 and ASC 360) and IFRS (IAS 36) have similar overall objectives. However, there are some differences related to testing, measuring, and recognizing impairment (note that this is not an all-inclusive listing of differences):

Online learning

Our eLearning courses are designed to help accounting firms and companies, as well as individuals, learn more about a specific accounting topic. Below are the courses available on impairment of nonfinancial assets (both U.S. GAAP and IFRS):

U.S. GAAP (ASC 350 and ASC 360)

Impairment: PP&E and Intangible Assets– Impairment exists when the carrying amount of an assets exceeds its fair value, but not all impairment is recorded in the financial statements. Determining if an asset or an asset group is impaired takes a significant amount of judgment and an understanding of the requirements of the different impairment tests within U.S. GAAP. But no worries because this CPE-eligible, eLearning course (1.5 CPE) has you covered! After discussing the scope of the impairment guidance and the concept of asset groups, this online course walks you through the “trigger-based” impairment test found within ASC 360 that is applicable to PP&E and intangible assets with finite lives. What about intangible assets with indefinite lives? We cover that too as we walk through the guidance within ASC 350. The online course concludes with a review of the presentation and disclosure requirements within U.S. GAAP related to impairment. If you’re looking for guidance on testing goodwill for impairment, you won’t find it in this course. We have a separate eLearning course dedicated to that topic.

Impairment: Goodwill– Goodwill arises in a business combination and represents the difference between the purchase price and the fair value of the net assets acquired. Under U.S. GAAP, goodwill is not amortized; therefore, it is required to be tested for impairment on an annual basis at the reporting unit level in accordance with ASC 350. In this CPE-eligible, eLearning course (1.0 CPE) we discuss how to identify a reporting unit and the process for allocating goodwill amongst the various reporting units. Once this allocation is done, we dive into the requirements for testing goodwill for impairment. With over $3.5 trillion of goodwill sitting on corporate balance sheets, this online course is a must for any accounting responsible for financial reporting or auditing U.S. GAAP financial statements!

We’ve bundled these eLearning courses into our U.S. GAAP impairment course collection for big savings!

IFRS (IAS 36)

Impairment of Assets (Part One): IAS 36– Impairment impacts entities in all industries and even though it can occur frequently, it still requires significant judgment. And the process for identifying impairment will depend on the type of asset; therefore, it is critical to understand the related requirements! This CPE eligible (1.0 CPE) eLearning course explores the requirements under IAS 36 Impairment of Assets, including understanding when to test for impairment, at what level the test must be performed, and the correct order for testing various assets for impairment.

Impairment of Assets (Part Two): IAS 36– Impairment impacts entities in all industries and even though it can occur frequently, it still requires significant judgment. And the process for identifying impairment will depend on the type of asset; therefore, it is critical to understand the related requirements! This CPE-eligible (1.0 CPE) eLearning course will explore the IFRS accounting requirements under IAS 36 Impairment of Assets, specifically how to measure the recoverable amount of an asset (or CGU) and how to recognize an impairment loss. 

We’ve bundled these eLearning courses into an IFRS impairment course collection for big savings!

Accounting resources

We’ve written several blog posts on the topic of impairment of nonfinancial assets, of which we’ve highlighted our most popular posts below. Subscribe to our blog where you’ll receive the latest posts written by the GAAP Dynamics team.

Triggering event? Assessing Impairment of Nonfinancial Assets
This post explores the requirements for assessing impairment of nonfinancial assets (ASC 350/ASC 360) when a triggering event is identified.

Market Disruption and Impairment of Assets under IAS 36
Explore the requirements of IAS 36 Impairment of Assets and different considerations that may apply during times of market disruption.

A Timely Reminder: Accounting for an Impairment Loss under ASC 360
Impairment has been all over the news lately. So how do you account for an impairment loss under ASC 360? This post walks you through the guidance.