This paper applies FASB ASC 360-10 and IFRS IAS 36 to a real-estate asset impairment scenario drawn from Persellin et al. (2014). It examines triggering events for recoverability testing, the distinction between assets held for use and assets held for sale, and how fair value is determined under ASC 820. The paper also addresses impairment recognition timing, depreciation estimates, reversal rules under both U.S. GAAP and IFRS, and the ethical dimension of disagreeing with a senior colleague's impairment recommendation. A stakeholder analysis concludes the discussion by tracing the potential domino effects of an impairment decision across shareholders, board members, buyers, auditors, and regulators.
Under FASB ASC 360-10-35-21, a long-lived asset that undergoes a change can be tested for recoverability. A decrease in market price could trigger this event, as could an adverse change in the asset's condition or use. For the case described by Persellin et al. (2014), either of these two events could be used to test the land's recoverability, and an impairment event has more than likely occurred.
According to ASC 360-10-35-31, a "primary asset of an asset group cannot be land," which means that the applicable guidelines will differ from those governing other long-lived assets. Moreover, impairment guidelines for assets held for sale versus assets held for use must follow the stipulation in ASC 360-10 that impairment charges must be reversed if there is a change in the use of the asset. Therefore, whether the asset is being used or sold will make a material difference in how impairment is measured and recorded.
Fair value can be determined by reference to ASC 820, which states that "fair value is the price to sell an asset or transfer a liability and, therefore, represents an exit price, not an entry price." Accordingly, the $10 million offer may be used as an exit price; however, it must not be treated as reflecting fair value unless it represents the exit price in the principal market — or most advantageous market. Fair value under ASC 820 is thus a market-based measurement.
Valuation methodologies should be applied to assess fair value: namely, the market approach, the income approach, and the cost approach. Additionally, paragraphs 360-10-45-9 through 45-11 can serve as a guide in this matter if the asset is classified as a long-lived asset held for sale.
Per IAS 36, paragraph IN6, the "price for bearing the uncertainty inherent in the asset" should be reflected in the calculation of an asset's value in use. IAS 36-11 further provides that "the ability of an intangible asset to generate sufficient future economic benefits to recover its carrying amount is usually subject to greater uncertainty before the asset is available for use than after." An impairment loss should be recognized based on calculations showing that the projected sale of the asset is $2.5 million below either of the respective values attributed to the land.
Regarding timing, an impairment adjustment should not be made prematurely. Because the sale has not yet closed — and in real estate transactions nothing is certain until closing — adjusting the impairment loss at the end of 2015 would be premature. It is more prudent to await the closure of the sale and record the adjustment in the appropriate quarter.
ASC 360-10-35-22 may be applied to property, plant, and equipment depreciation estimates, while ASC 350-30-35-1 through 35-5 may be used to determine the useful life of an intangible asset. In this case, those provisions are appropriate given the need to project future cash flows and assess associated impairment. Revised depreciation and cash flow projections should be considered, provided the owner agrees to use them.
"GAAP prohibits reversals; IFRS permits under conditions"
"Handling disagreement with a senior colleague's recommendation"
"Domino effects of impairment across all stakeholders"
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