Impairments and disposals 

Clarifying intent

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 interest rate changes, inflation, and a tight labor market, which together have contributed to bank failures or downgrades, businesses’ struggles to raise capital, companies’ announcements of layoffs, broader restructuring plans, and changes in customer behavior. Further, the ways in which people are living and working in the post-pandemic environment have significantly affected real estate demands and preferences.

How these factors affect cash flow and fair value estimates used in impairment analyses should be considered. As businesses evolve in response to these conditions, preparers may also need to make determinations pertaining 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 flowchart below summarizes how long-lived assets are accounted for and presented on the basis of the entity’s intent regarding the assets.

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).

Continue your learning on impairments and disposals of long-lived assets and discontinued operations

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.