Long-Term Asset Impairment

In March of 1995 the Financial Accounting Standards Board issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The statement established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used. The statement also established accounting standards for the disposal of long-lived assets and certain identifiable intangibles. (fasb.org/stsum121) However, shortly after Statement 121 was released numerous implementation issues were identified. Statement 121 also created measurement and presentation differences in the accounting for long-lived assets to be disposed of within the scope of Statement 121, and those under APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business". (BDO Seidman) Statement 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under Opinion 30, therefore businesses accounted for the disposal or expected disposal of long-lived assets that were a segment of a business using one set of rules and the disposal of long-lived assets that were not a segment of a business using another standard. (Meeting and Luecke)

In order to resolve these problems the Board issued Statement 144 entitled "Accounting for the Impairment or Disposal of Long-Lived Assets" in late September 2001, effective for fiscal years beginning after December 15, 2001. The board felt that the issuance of Statement 144 provided a single accounting model for long-lived assets to be disposed of by sale that would eliminate the differences in accounting for those transactions and resolve the implementation and practice problems, associated with impairment, that were identified. Throughout the course of this paper the differences between Statement 144 and 121 will be identified, specifically when it comes to impairment evaluation, as well as the benefits of these changes from a preparer and user point of view.

Although Statement 144 supersedes Statement 121; 144 still retains the requirement of Statement 121 to recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows, as well as the requirement to measure an impairment loss as the difference between the carrying amount and the fair value of the asset. (fasb.org/stsum144) Under Statement 144, the carrying amount of an asset is not considered recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and ultimate disposal. (BDO Seidman) The assets that Statement 144 applies to are the recognized long-lived assets of all companies, including not-for-profit organizations that are held or are to be disposed of. Statement 144 does not apply to goodwill, indefinite intangible assets, long-term customer relationships of a financial institution, financial instruments, deferred policy acquisition costs, or deferred tax assets.

Statement 144 supersedes APB Opinion 30 also, but maintains Opinion 30's requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of a company that has either been disposed of or is classified as held for sale. (BDO Seidman) Statement 144 significantly changed the requirements of reporting discontinued operations required by Opinion 30. The changes hinge on the new concept of a "component of an entity" and expand what a company can consider as a discontinued operation, as well as how a company measures the reported results.

A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company. Thus it could be a reportable segment or an operating segment, a reporting unit, a subsidiary, or an asset group. (Meeting and Luecke) As a result, under Statement 144, more asset sales or disposals will be eligible to be accounted for as discontinued operations. This is more expansive than the guidance in Opinion 30, where only a segment of a business whose activities represented a separate major line of business could qualify for reporting as discontinued operations. (BDO Seidman) Although 144 expands the use of discontinued operations it eliminates the previous practice of accruing all future operating losses associated with the disposal. (BDO Seidman) By relaxing criteria for classifying a component for discontinued operation treatment, Statement 144 will provide an opportunity for management to dispose of less productive and profitable assets and focus on their best business.

To resolve the implementation issues that arose from Statement 121, Statement 144 describes three different applications. Statement 144 removes goodwill from its scope and, therefore, eliminates the requirement of Statement 121 to allocate goodwill to long-lived assets to be tested for impairment. Statement 144 also describes a probability-weighted cash flow estimation approach to deal with situations where alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or when a range is estimated for the amount of possible future cash flows. (fasb.org/stsum144) The third method of resolving the implementation issues is that Statement 144 established 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. A primary asset is the principal long-lived tangible asset being depreciated or intangible asset being amortized that is the most significant component asset from which the asset group derives its cash flow generating activities. Statement 144 specifically prohibits land, goodwill, or an indefinite life intangible asset from being a primary asset. (BDO Seidman)

Statement 144 classifies long-lived assets into three distinctive categories. The categories are: held and used, disposed of other than by sale, and disposed of by sale. Statement 144 also implemented a three-step approach to recognize and measure an impairment loss. The first step is for a company to test a long-lived asset for recoverability whenever certain impairment indicators are present. The second step is a company should recognize an asset impairment loss only after assessing if the carrying amount of a long-lived asset is not recoverable, and it exceeds its fair value (step 3). (BDO Seidman)

The first step, checking asset impairment, should be applied at the lowest level of cash flows that can be tied to specific assets or asset groups. As mentioned earlier the one major change in this Statement compared to Statement 121 is that Goodwill is excluded from