Question

Matt Jones recently joined Kind Company as a staff accountant in the controller's office. Kind Company provides warehousing services for companies in several East Coast cities. The location in Philadelphia, PA, has not been performing well due to increased competition and the loss of several customers that have recently gone out of business. Matt's department manager suspects that the plant and equipment may be impaired and wonders whether those assets should be written down. Given the company's prior success, this issue has never been considered in the past, and Matt has been asked to conduct some research on this issue.

Instructions:

Access the FASB Codification and provide codification references to support your responses.

1. What is the authoritative guidance for asset impairments? Briefly discuss the scope of the standard (i.e., explain the types of transactions to which the standard applies).
2. Give several examples of events that would cause an asset to be tested for impairment. Does it appear that Kind should perform an impairment test? Explain.
3. What is the best evidence of fair value? Describe alternate methods of estimating fair value.

Answer 1

Statement no.144 of FASB deals with accounting of impairement of assets.

The core principle is that an asset must not be carried in the financial statements at more than the highest amount to be recovered through its use or sale. If the carrying amount exceeds the recoverable amount, the asset is described as impaired.

Scope;

This statement is applicable to long-lived assets of an entity to be held and used or to be disposed of, including (a) capital leases of lessees, (b) long-lived assets of lessors subject to operating leases, (c) proved oil and gas properties that are being accounted for using the successful-efforts method of accounting and (d) long-term prepaid assets

This Statement does not apply to (a) goodwill, (b) intangible assets not being amortized, (c) long-term customer relationships of a financial institution, such as core deposit intangibles, credit cardholder intangibles, and servicing assets, (d) financial instruments, including investments in equity securities accounted for under the cost or equity method, (e) deferred policy acquisition costs, (f) deferred tax assets, and (g) unproved oil and gas properties that are being accounted for using the successful-efforts method of accounting. This Statement also does not apply to long-lived assets for which the accounting is prescribed by: • FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers • FASB Statement No. 50, Financial Reporting in the Record and Music Industry • FASB Statement No. 63, Financial Reporting by Broadcasters • FASB Statement No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed • FASB Statement No. 90, Regulated Enterprises—Accounting for Abandonments and Disallowances of Plant Costs

A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The following are examples of such events or changes in circumstances:

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,6 a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

On the basis o the given circumstances in the question and after considering the above provisions Kind should perorm an impairement test

The fair value of an asset (liability) is the amount at which that asset (liability) could be bought (incurred) or sold (settled) in a current transaction between willing parties, Quoted market prices in active markets are the best evidence of fair value and shall be used as the basis for the measurement, if available. However, in many instances, quoted market prices in active markets will not be available for the long-lived assets (asset groups) covered by this Statement. In those instances, the estimate of fair value shall be based on the best information available, including prices for similar assets (groups) and the results of using other valuation techniques.