Among the many consequences of COVID-19, impacts such as business and production disruptions, supply-chain interruptions, negative impacts on customers, volatility in the equity and debt markets, reduced revenue and cash flows, and other economic consequences may occur. The entities whose operations are negatively affected by COVID-19 may need to consider testing their assets for impairment.
Long-lived assets to be held and used (including property, plant, and equipment; finite-lived intangible assets; and right-of-use assets recognized under FASB ASC 842, Leases) are tested for impairment in accordance with the guidance in FASB ASC 360-10. FASB ASC 360-10-35-21 requires that they be tested for recoverability (which involves comparing the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset or asset group1 being evaluated with the carrying amount of that asset or asset group) whenever events or changes in circumstances indicate that their carrying amount may not be recoverable and provides the following examples of such events:
a. A significant decrease in the market price of a long-lived asset (asset group)
b. A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition
c. A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator
d. An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group)
e. A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group)
f. A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.
Given the impact of COVID-19, entities may conclude that they should test their long-lived assets to be held and used for recoverability. As provided in FASB ASC 360-10-35-22, when such assets are tested for recoverability, it also may be necessary to review depreciation estimates and method or the amortization period.
If the undiscounted cash flows used in the recoverability test are less than the long-lived asset’s (asset group’s) carrying amount, then it is necessary to determine its fair value. When determining the fair value of the asset (asset group), entities should follow the guidance in FASB ASC 820, Fair Value Measurement, which establishes a framework for measuring fair value when US GAAP requires or permits such a measurement. FASB ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Also, FASB ASC 360-10-35-36 provides the following guidance on estimating fair value: “[f]or long-lived assets (asset groups) that have uncertainties both in timing and amount, an expected present value technique will often be the appropriate technique with which to estimate fair value.”
It should be noted that cash flows used to test the recoverability of long-lived assets could be different from cash flows used to estimate their fair value. This is because FASB ASC 360-10-35-30 requires that “[e]stimates of future cash flows used to test the recoverability of a long-lived asset (asset group) shall incorporate the entity’s own assumptions about its use of the asset (asset group) and shall consider all available evidence.” However, when estimating fair value of those assets, FASB ASC 820 requires using market participant assumptions.
FASB ASC 360-10-35-17 states that an impairment loss should be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. An impairment loss should be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value. FASB ASC 360-10-35-28 provides that “[a]n impairment loss for an asset group shall reduce only the carrying amounts of a long-lived asset or assets of the group. The loss shall be allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group shall not reduce the carrying amount of that asset below its fair value whenever that fair value is determinable without undue cost and effort. See Example 1 (paragraph 360-10-55-20) for an illustration of this guidance.”
Order of Impairment Testing. Entities should also consider whether to test their other assets for impairment and to make sure they perform those tests in the appropriate order. For a discussion of order of impairment testing, see the “When to Test Goodwill and Indefinite-Lived Intangible Assets for Impairment” article.
Yelena Mishkevich, CPA, CGMA
Senior Manager, Accounting Standards - AICPA
1 FASB ASC 360-10 provides that, for purposes of recognition and measurement of an impairment loss, a long-lived asset or assets should 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. For further discussion regarding grouping and allocation of impairment loss, see paragraphs 23-28 in FASB ASC 360-10-35.