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This statement supersedes:
ş FASB Statement No. 121,
Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed
Of,

and the accounting and reporting provisions of:

ş APB Opinion No. 30,

Reporting the Results of
Operations²Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and
Transactions,

ş ARB No. 51,

Consolidated Financial Statements,

to eliminate the exception to consolidation for a subsidiary

for which control is likely to be temporary.
Ô


 

V Because Statement 121 did not address the accounting for a segment
of a business accounted for as a discontinued operation.

V Under Opinion 30, two accounting models existed for long-lived

assets to be disposed of.

V The Board decided to establish a single accounting model, based on

the framework established in Statement 121, for long-lived assets to
be disposed of by sale.

V The Board also decided to resolve significant implementation issues

related to Statement 121.
 !"#c# #$#c%#

ş Businesses recognize impairment when:

The carrying amount (book value) of a long-lived asset or asset group

exceeds its fair value and is not recoverable.

FASB defines impairment loss as the amount by which the carrying value
(book value) exceeds an asset's fair value.

The asset is written down to fair value.

The fair value becomes the new carrying value and depreciation is recorded
over remaining useful life.

Restoration of a previously recognized impairment loss is prohibited.

  
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şAn asset is considered recoverable when future
cash flows exceed the carrying amount.
*No impairment is recognized*

şAn asset is not recoverable when future cash

flows are less than the carrying amount.
*In such cases the company recognizes an
impairment loss for the amount the carrying
value exceeds fair value*
ş Statement no. 144 defines a component of an entity as operations
and cash flows that can be clearly distinguished both operationally
and for financial reporting purposes from the rest of the entity.

A component may be a:
* Reportable segment or an operating unit
* A reporting unit
* A subsidiary or an asset group

ş Statement no. 144 defines asset group as "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."
ş When circumstances change indicating a carrying amount may not
be recoverable, should test the asset for impairment.

A test may be called for when one or more of these events occur:
* Decline in market value

* Change in way asset is used or physical change in asset

* Adverse changes in legal factors or business climate

that could affect an asset's value
(including an adverse action or assessment by a regulator)
 * Accumulated costs in excess of amounts originally expected to
construct or acquire asset

* Current period losses with history of operating or cash flow losses

associated with asset
.
* Current expectation that, more likely than not, a long-lived asset
will be sold or disposed of significantly before the end of its
previously estimated useful life

&  
ş A long-lived asset 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.
Primary asset approach:
FASB 144 establishes a "primary-asset" approach to determine the cash flow
estimation period for a group of assets and liabilities that represents the unit
of accounting for a long-lived asset to be held and used

ş Goodwill is included in the asset group only if the asset group is a

reporting unit.

ş Other assets and liabilities (inventory, accounts payable, long-term debt, etc)
are to be properly valued in accordance with GAAP prior to testing the
asset group for recoverability

 
 
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ş Whether the entity would have acquired other assets in a group without this
asset.

ş The investment required to replace the asset.

ş The asset's remaining useful life relative to other assets in the group.

ş If the primary asset does not have the longest remaining life of the group,
the cash flows from operating the group still are based on that asset's
estimated life--on the assumption the company will dispose of the entire
group at the end of the primary asset's life.

#
An asset group consists of asset X with an estimated remaining life of
five years, asset Y with an estimated life of seven years and asset Z
(the primary asset) with a four-year life.

The cash flows used to test for impairment assume the

company uses the asset group for four years and disposes of it.

To test for impairment, include the group's salvage value at the

end of year 4 in the cash flow computations.

Future cash flows must be based on the asset group's current service
potential (four years for the three assets above) at the date of the
impairment test.

Future cash flows should include expenditures to maintain the current

service potential, including replacing component parts of the long-lived
asset and assets other than the primary one.

Accountant should exclude cash flows that increase service potential but
include maintenance costs.
#! !"#c#i ÔÔ#( "#Ôc)

ş By comparing its estimated future undiscounted cash flows with its carrying
value.

ş The estimated cash flows used to test for recoverability must include only
future flows directly associated with use and eventual disposal of a given
asset.
(should exclude interest charges it will expense)

ş Cash flow estimates are based on the entity's assumptions about employing
the long-lived asset for its remaining useful life.
When an asset group consists of long-lived assets with different remaining
useful lives- this estimated is based on the life of the primary asset (the
most significant asset from which the group derives its cash flow generating
capacity)
( !*+cÔ*# #
ş When a company recognizes an impairment loss for an asset group, it must allocate
the loss to the long-lived assets in the group on a pro rata basis using their relative
carrying amounts.

There is an exception when the loss allocated to an individual asset reduces its
carrying amount below fair value. If accountant can determine fair value without
undue cost and effort, the asset should be carried at this amount. This requires an
additional allocation of the impairment loss. The adjusted carrying value after the
allocation becomes the new cost basis for depreciation over the asset's remaining
useful life.

ş A business must include an impairment loss in the income from continuing operations
before income taxes line on its income statement.

ş A not-for-profit organization would include the loss in income from continuing

operations in the statement of activities.

ş When a subtotal such as income from operations is present, accountant should include
the impairment loss in determining that amount.
#, 

There is a significant adverse change in the business climate in one of the

industries East Bay Inc. operates in. The company believes this change could
impair some of its long-lived assets.

The company groups assets at the lowest level with identifiable cash flows
and tests them for impairment.

One group is the MagiTech operation, which is not a reporting entity.

Current conditions have reduced the fair value of inventory, which has a
carrying value of $175,000. Using applicable GAAP (lower of cost or
market rule), East Bay determines the inventory's fair value is $150,000. It
must make inventory adjustments before testing for long-lived asset
impairment. It adjusts inventory down by $25,000 and reports this amount
in the income statement.

MagiTech's long-lived assets consist of A, B, C, D and E; D is the primary

asset.
    


! 
 

  

Oong-lived asset Carrying value Remaining life

A 100,000 6

B 200,000 10

C 600,000 9
D (Primary) 950,000 8
E 350,000 12

Total 2,200,000
6They are deemed impaired because
their fair value and future
undiscounted value are less than their
carrying value.

* If future undiscounted cash flows

were greater than carrying value, East
Bay would recover the carrying value
by using the asset group and would
not recognize an impairment.
6Asset D, the primary asset, has a remaining life of eight
years. This determines the period over which the company will estimate
cash flows to see if the carrying amount is recoverable.

* Assume future cash flows for the next eight years are $1,700,000 with
an additional $75,000 realized from disposing of the group at the end of
the period.

* Since the $1,775,000 cash flow is less than the $2,200,000 carrying
amount and the group's fair value is $1,450,000A also less than the
carrying amount--the company should recognize a $750,000
impairment loss in income from continuing operations before taxes on
its income statement.

c



Oong- Adjusted Pro Rata Allocation of Adjusted

Oived Carrying Allocation Impairement Carrying
Asset Value Factor Ooss Value

A 100,000 0.05 37,500 62,500

B 200,000 0.09 67,500 132,500

C 600,000 0.27 202,500 397,500

D-
Prima
ry 950,000 0.43 322,500 627,500

E 350,000 0.16 120,000 230,000

Total 2,200,000 1.00 750,000 1,450,000

* The impairment loss allocated to a long-lived asset should not reduce
its carrying value below fair value. Assuming asset B's fair value is
$160,000, the pro rata allocation reduces its carrying value below fair
value (carrying value is $132,500A $27,500 below fair value).

* The company needs to increase B's fair value by $27,500 to $160,000

and allocate an additional $27,500 loss pro rata to assets A, C, D and E.

-'
.

Oong- Adjusted Pro Rata Allocation of Adjusted

Oived Carrying Allocation Impairement Carrying
Asset Value Factor Ooss Value
A 62,500 0.05 -1,375 61,125

C 397,500 0.3 -8,250 389,250

D-
Prima
ry 627,500 0.48 -13,200 614,300
E 230,000 0.17 -4,675 225,325
Subtotal 1,317,500 1 -27,500 1,290,000

B 132,500 27,500 160,000

Total 1,450,000 1,450,000

 
  / 


  





   

*A description of the impaired long-lived asset and the

facts and circumstances leading to its 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 the loss.

* The method or methods used to determine fair value.

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ş A company must continue to classify long-lived assets it plans to dispose of

by some method other than by sale as held and used until it actually gets
rid of them.
Other disposal methods include abandonment, exchange for a similar
productive asset or distribution to owners in a spin-off.

ş A company should report long-lived assets to be abandoned or distributed

to owners that consist of a group of assets (and liabilities) that are a
"component of an entity" in the income statement as discontinued
operations.
If the assets are not a component, accountant should report their disposal as
part of the company's income from continuing operations.
c#+ # i $#Ô$c)c#

Situations include:
ş Abandonment
A long-lived asset a company will abandon is considered disposed of when the
company stops using it.

A temporarily idle asset is not accounted for as abandoned.

If an entity plans to abandon a long-lived asset before its estimated useful life, it
will treat the asset as held and used, test it for impairment and revise depreciation
estimates.

During use before abandonment, the company should depreciate the asset so that at
disposal or abandonment, its carrying value equals its salvage value. This amount
should not be less than zero.
c#+ # i $#Ô$c)c#

ş Distribution to owners in a spinoff or Exchange for similar

productive asset

A long-lived asset to be distributed to owners or exchanged for a

similar productive asset is considered disposed of when it is
distributed or exchanged.

When the asset is classified as held and used, any test for
recoverability must be based on using the asset for its remaining
useful life, assuming disposal will not occur. If the carrying amount
exceeds fair value at disposal, the company must recognize an
impairment loss.

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A company must classify a long-lived asset
it will sell as held for sale in the period it
meets all of these criteria:

* Management with commits to a plan to sell.

* Asset is available for immediate sale in

its present condition

* The company has initiated an active

program to locate a buyer.
 !"#c# # 

6Sale is probable within one

year

6Asset is being actively

marketed for a reasonable
price

* It is unlikely that the plan to

sell will be changed
 !"#c# # 
ş If the company meets the above criteria after the balance-sheet date but
before it issues its financial statements, it must continue to classify the asset
as held and used.

ş In the notes to the financial statements, the company must disclose the facts
and circumstances leading to the expected disposal, the likely manner and
timing of the disposal, the carrying amount(s) of the major classes of assets
and liabilities included in the disposal group.

ş If the company tests the asset for recoverability at the balance-sheet date, it
should do so on a held-and-used basis.

ş Future cash flow estimates used to test for recoverability must take into
account the possible outcomes that existed at the balance-sheet date,
including a future sale.

ş An impairment loss is calculated and reported in the same way it is for

assets held and used because this is the asset's status at the balance-sheet
date.
 !"#c# # 
*  

ş Companies must adjust the carrying amounts of assets that are part of a
disposal group classified as held for sale not covered by Statement no. 144,
in accordance with other applicable GAAP before measuring the group's
fair value.

ş A long-lived asset held for sale must be measured at the lower of its
carrying amount or fair value less cost to sell.

ş Exclude expected future losses from operations.

ş Assets classified as held for sale are not

depreciated or amortized.
 !"#c# # 


#
ABC Corp. decides in October of year 1 to dispose of an asset
group that is a component of an entity. It meets all the
requirements to classify the group as a long-lived asset to be
disposed of by sale.

The group's carrying amount is $750,000; its fair value $600,000

and the estimated cost to sell is $45,000.

The loss to be recognized in October of year 1

is $750,000 - ($600,000 - $45,000) = $195,000.

The new carrying amount is $555,000.

If ABC is a calendar-year corporation, on December 31 of year 1
it needs to review the fair value and cost to sell to see if it needs
to adjust the group's carrying amount.

If at that date the fair value has fallen to $575,000 with an

estimated cost to sell of $45,000, the company would recognize
an additional $25,000 loss.

The carrying amount is now $530,000.

ABC would report a total loss of $220,000 on its year 1 income

statement. It sells the disposal group in May of year 2 for $595,000 with
a $50,000 cost to sell. The disposal proceeds are $545,000A $15,000
more than the carrying value.

ABC would report this gain on its income

Statement.
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An entity must report the results of operating a

component it has either disposed of or classified as held
for sale in discontinued operations if it meets both of
these conditions:

* The component's operations and cash flows have been

or will be eliminated from the ongoing operations as a
result of the disposal.

* The entity will not have any significant continuing

involvement in the component's operations after the
disposal.
Ô#+ Ô!( %# +#Ôc 

ş In a period when an entity disposes of a component, the income statement

of a business or the statement of activities of an Non Profit Organization
must report the results of the component's operations as discontinued
operations.

ş The entity would recognize the gain or loss from classifying the component
as held for sale or disposal in discontinued operations.

ş If the disposal group is a component of an entity, as in the earlier ABC

example, the component's operations results (a $400,000 loss) are included
in discontinued operations for year 1.

ş The $220,000 loss on the disposal group is part of discontinued operations

in year 1.

ş The year 2 income statement will include--as discontinued operations--the

component's operations for January through disposal in May, with the
$15,000 gain on disposal also reported here. Discontinued operations less
applicable tax reduction must be reported as a separate component of
income before extraordinary items and the cumulative effect of accounting
changes.
Ô#+ Ô!( %# +#Ôc 

ş A company must disclose the gain or loss it recognizes when it classifies an

asset as held for sale or disposal on either the face of the income
statement or in the notes.

ş Adjustments related to disposing of a component of an entity in a prior

period, which the company reported as discontinued operations, must be
classified separately in discontinued operations in the current period.

ş A gain or loss on a long-lived asset that is not an entity component must

be included in income from continuing operations before income taxes in
the income statement. If the entity uses a subtotal such as "income from
operations," it must include the gains or losses there.
Ô#+ Ô!( %# +#Ôc 

* The gain or loss on sale of the long-lived asset. Accountants should do

this if these gains and losses are not separately presented on the face of
the income statement, the caption in the income statement or
Statement of activities.

* If applicable, the revenue and pretax profit or loss reported in

discontinued operations.

* If an entity decides not to sell a long-lived asset previously classified

as held for sale, or removes an asset or liability from a disposal group,
it must describe in the notes the facts and circumstances leading to the
change in plan and its effect on operations for that period and any prior
period presented.
 +Ô##c c( %Ô#
ş A company must present a long-lived asset held for sale separately in its
financial statements. Major classes of assets and liabilities held for sale must
not be offset and presented as one amount, they must be separately disclosed
either on the face of the statement itself or in the notes.

ş Statement no. 144 requires a company to disclose information in the notes for
a period in which it either sells a long-lived asset or classifies it as held for
sale.

Companies must disclose:

* The facts and circumstances leading to the expected disposal, the likely manner
and timing and, if not separately presented, the carrying amount(s) of major
classes of assets and liabilities included in the disposal group.

* The loss recognized for any initial or subsequent write-down to fair value
less cost to sell or a gain not more than the cumulative loss previously
recognized for a write-down to fair value less cost to sell.
$
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The changes in this Statement improve financial reporting by requiring

that one accounting model be used for long-lived assets to be disposed
of by sale, whether previously held and used or newly acquired, and by
broadening the presentation of discontinued operations to include
more disposal transactions.

Therefore, the accounting for similar events and circumstances will

be the same. Additionally, the information value of reported financial
information will be improved.

Finally, resolving significant implementation issues will improve

compliance with the requirements of this Statement and, therefore,
comparability among entities and the representational faithfulness of
reported financial information.
  #, 

Johnson Company purchased equipment 8 years ago for $1,000,000.

The equipment has been depreciated using the straight-line method with a
20-year useful life and 10% residual value.

Johnson's operations have experienced significant losses for the past 2 years
and, as a result, the company has decided that the equipment should be
evaluated for possible impairment.

The management of Johnson Company estimates that the equipment has a

remaining useful life of 7 years.

Net cash inflow from the equipment will be $80,000 per year. The fair
value of the equipment is $240,000. No goodwill was associated with the
purchase of the equipment.
(a) Determine if an impairment loss should be recognized.
What is the book value of the asset?

We need to first figure out how much is in accumulated

Depreciation:

Annual depreciation for the equipment has been

$45,000 ($1,000,000 - $100,000)/20 years
Current book value of the equipment is:
Original cost ........................................ $1,000,000
Accumulated depreciation ($45,000 x 8 years) ......... 360,000
Book value ........................................... $ 640,000
What are the projected cash flows from asset?

According to FASB 144, the existence of impairment is

determined by comparing book value of $640,000 to the
undiscounted future cash flows of $560,000.

The fair value is lower, so an impairment loss should be

recognized.
(b)Determine the amount of the loss and prepare the journal entry to record the
loss.
The impairment loss is equal to the $400,000 difference
between the book value of the equipment and its fair value.
($640,000 - $240,000)

The impairment loss would be recorded as follows:

Accumulated Depr.-Equip .......................360,000
Ooss on Impairment of Equipa ................400,000
Equipment ($1,000,000 - $240,000) ....................760,000
(c)What journal entry should Johnson Company make if future cash flows
related to the equipment were $980,000 in total?

Since the future cash flows (undiscounted) equal $980,000

and this amount is greater than the book value of
$640,000, Johnson Company will not do anything.
No impairment is recognized and no upward revaluation is
recorded.