Triggering Event? Assessing Impairment of Nonfinancial Assets

A triggering event is when an event happens, or a circumstance changes, that would more likely than not reduce the fair value of a nonfinancial asset below its carrying amount. Determining whether a triggering event would cause the need for an interim impairment test of a nonfinancial asset involves a significant amount of judgment and careful consideration of current factors such as macroeconomic conditions, industry and market conditions, cost factors, and economic performance.

One of the challenges when assessing nonfinancial assets for impairment is that cash flows are not always available for individual assets, so a company must first determine the lowest level at which information related to identifiable future cash flows can be obtained. In most instances, if an asset is used together with other assets to generate cash flows, it is grouped together with those assets into an “asset group” and cash flows are assessed at the group level.

We discuss this challenge and many other challenges of impairment testing for nonfinancial assets within our impairment course collection. Note that the remainder of this post will be referring to “the asset” for impairment, but keep in mind that a company’s assessment may relate to an “asset group”.

Also, the remainder of the post will discuss the various impairment tests for nonfinancial assets. Note that they are IN ORDER of how they should be performed!

Indefinite-lived intangible assets

If a company determines that an indicator of impairment exists, it should first assess its indefinite-lived intangible assets. Indefinite-lived intangible assets are accounted for under ASC 350-30 and are required to be tested for impairment on an annual basis, or more frequently if impairment indicators exist. Testing for indefinite-lived intangible assets is a one-step process, but a company does have the option to perform an optional, qualitative assessment.

This means that a company would consider qualitative factors (the same factors considered when determining whether a triggering event exists) to assess whether it’s more likely than not (i.e., more than 50%) that its intangible asset’s fair value is less than its carrying amount. If a company elects to not perform the qualitative assessment (because it is optional) or if the company “fails” this step, then the company moves on to the one-step test.

One-step test

The carrying amount of the asset is compared to the fair value of the asset, which is determined in accordance with ASC 820. If the fair value of the asset is greater than the carrying amount, then there is no impairment!

However, if the fair value is less than the carrying amount, there is an impairment and the difference between the carrying amount and the fair value represents the impairment loss to be recognized. The company must write-down the asset to its fair value, which becomes the new cost basis.

We cover the impairment of indefinite-lived assets in this course!

Inventory

Inventory is measured at the lower of cost or net realizable value (excluding inventory that uses the LIFO method or retail inventory method – this inventory is measured at the lower of cost or market) and ASC 330, Inventory, requires any declines in net realizable value to be recognized in the period that such declines occur.

If a company determines that the carrying value has declined, the company must assess whether this decline is temporary (i.e., the inventory values are expected to be restored by the end of the company’s fiscal year) because temporary losses do not need to be recognized as of an interim date. If the decline is not temporary, then the company should write-down the value of the inventory directly, with a corresponding loss recorded in the income statement.

In addition, companies should also be contemplating any purchase commitments they’ve entered into or any excess capacity costs they might be experiencing. For more information on inventory considerations, check out this course!

Long-lived assets

Long-lived assets include land, buildings, machinery and equipment, and intangible assets with finite lives, and are accounted for under ASC 360. ASC 360 requires these assets to be tested for impairment when a triggering event occurs, and the company believes the carrying amount of an asset may not be recoverable (there is no annual impairment testing requirement). After a company tests its indefinite-lived intangible assets (and other assets subject to impairment such as inventory, receivables, etc.), it must move on to assessing its long-lived assets.

Testing long-lived assets for impairment is a two-step process.

Step 1: Recoverability test

The carrying amount of the asset is compared to the sum of the undiscounted cash flows expected to result from the use (and eventual disposal) of the asset. It’s important to note that the assumptions used to develop the undiscounted cash flows should be the company’s own assumptions (not third-party assumptions) and the cash flow estimation period used should align with the remaining useful life of the asset.

• If the undiscounted cash flows are greater than the carrying amount, the asset’s carrying amount is recoverable and there is no impairment! However, if the undiscounted cash flows are less than the carrying amount, the company must move on to Step 2 to measure the amount of impairment.

Step 2: Measuring the impairment

The carrying amount of the asset (as of the date of the recoverability test) is then compared to the fair value of the asset, which is determined in accordance with ASC 820. As such, the cash flows are based on market participant assumptions (irrespective of the entity’s planned use for the asset).

• If the fair value of the asset is greater than the carrying amount, then there is no impairment! However, if the fair value is less than the carrying amount, there is an impairment and the difference between the carrying amount and the fair value represents the impairment loss to be recognized. The company must write-down the asset to its fair value, which becomes the new cost basis.

For more information on the impairment of long-lived assets, check out this course!

Goodwill

After testing indefinite-lived intangible assets and long-lived assets, a company will then move on to assessing goodwill for impairment. Goodwill is accounted for under ASC 350-20 and, similar to indefinite-lived intangible assets, is required to be tested for impairment on an annual basis, or more frequently if impairment indictors exist.

The process for testing goodwill is the same as testing indefinite-lived intangible assets (optional qualitative assessment and Step 1 comparison of the carrying value to fair value) discussed above.

For more information on the impairment of goodwill, check out this course!

Final thoughts

There are many requirements to consider when assessing the impairment of nonfinancial assets. We discuss these important considerations within our Impairment of Nonfinancial Assets topic page. Check out the page (or any of our courses linked above) if you’d like to learn more!

About GAAP Dynamics
We’re a DIFFERENT type of accounting training firm. We view training as an opportunity to empower professionals to make informed decisions at the right time. Whether it’s U.S. GAAP, IFRS, or audit training, we’ve trained thousands of professionals since 2001, including at some of the world’s largest firms. Our promise: Accurate, relevant, engaging, and fun training. Want to know how GAAP Dynamics can help you? Let’s talk!

Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.