Assets, PP&E & Impairment (US GAAP)

Why B? And why not the others?

Correct answer: B. No impairment loss — the carrying amount is recoverable under the undiscounted cash flow test, and fair value is compared to carrying amount only if that recoverability test fails

ASC 360-10-35 uses a two-step model for long-lived assets held and used. Step 1, the recoverability test, compares the carrying amount to the total undiscounted cash flows expected from the asset's use and eventual disposal. Here $560,000 of undiscounted cash flows exceeds the $500,000 carrying amount, so the asset is deemed recoverable and no impairment is recognized, regardless of what fair value shows. Fair value is only brought in as Step 2, to measure the loss, and only if Step 1 fails. Option A wrongly jumps straight to comparing fair value against carrying amount, skipping the recoverability test that the asset actually passed. Option C invents a two-consecutive-period persistence requirement that appears nowhere in ASC 360. Option D nonsensically nets undiscounted cash flows against fair value, two figures that are never combined under this model.

Source: FASB ASC 360-10-35 (Impairment or Disposal of Long-Lived Assets — recoverability test)

Why B? And why not the others?

Correct answer: B. Yes — all of the ASC 360-10-45-9 criteria can be met without a signed agreement: management is committed to a plan to sell, the factory is available for immediate sale, an active buyer search is underway, the price is reasonable, and the sale is probable within one year with no expected significant changes to the plan

ASC 360-10-45-9 sets out six criteria for held-for-sale classification: management commits to a plan to sell, the asset is available for immediate sale in its present condition, an active program to locate a buyer has been initiated, the sale is probable and expected to complete within one year, the asset is being actively marketed at a price reasonable in relation to its current fair value, and it is unlikely the plan will be significantly changed or withdrawn. None of these require a signed purchase agreement or buyer commitment, which would mean the sale has effectively already happened rather than being merely probable. Option A invents a binding-agreement precondition that isn't part of the six criteria. Option C confuses this accounting classification with unrelated securities-filing obligations. Option D wrongly conflates held-for-sale classification with discontinued-operations reporting, which is governed by separate criteria under ASC 205-20 requiring a strategic shift with a major effect on operations.

Source: FASB ASC 360-10-45-9 (criteria for classification as held for sale)

Why B? And why not the others?

Correct answer: B. No — ASC 360-10-35-20 prohibits reversing an impairment loss on a held-and-used long-lived asset once recognized, even if fair value later recovers; the written-down amount becomes the asset's new cost basis and is depreciated prospectively

Under ASC 360-10-35-20, once an impairment loss is recognized for a long-lived asset held and used, US GAAP prohibits reversing it even if the asset's fair value later recovers; the reduced carrying amount becomes the asset's new cost basis and is depreciated over its remaining useful life going forward. This differs from IFRS's IAS 36, which permits reversing impairment losses on most assets (other than goodwill) when circumstances improve. Option A describes the IFRS approach, not US GAAP. Option C invents an inflation-linked carve-out that does not exist in ASC 360. Option D is wrong because a later sale would simply produce an ordinary gain or loss on disposal recognized in the period of sale — GAAP does not permit retroactively restating a prior period's already-issued financial statements to undo a correctly measured impairment.

Source: FASB ASC 360-10-35-20 (prohibition on reversal of impairment losses)

Why A? And why not the others?

Correct answer: A. $1.5 million — the excess of the reporting unit's carrying amount over its fair value, recognized as a goodwill impairment loss because it does not exceed the $3 million goodwill balance

ASU 2017-04 replaced the old two-step goodwill impairment test in ASC 350-20 with a single-step test: the impairment loss equals the amount by which the reporting unit's carrying amount exceeds its fair value, capped at the total goodwill allocated to that unit. Here the shortfall is $9 million minus $7.5 million, or $1.5 million, which is less than the $3 million goodwill balance, so the loss recognized is $1.5 million rather than a full write-off. Option B overstates the loss by ignoring the excess-of-carrying-over-fair-value measurement; a full write-off of goodwill would only be correct if the shortfall equaled or exceeded the goodwill balance. Option C describes the old Step 2 hypothetical purchase price allocation that ASU 2017-04 eliminated. Option D is wrong because a goodwill impairment loss is recognized in operating income as part of continuing operations, not as a direct adjustment to equity.

Source: FASB ASC 350-20-35 as amended by ASU 2017-04 (Simplifying the Test for Goodwill Impairment)

Why A? And why not the others?

Correct answer: A. Nothing further this period — because the qualitative assessment concluded impairment is not more likely than not, the company may bypass the quantitative fair-value comparison for this testing cycle

ASC 350-30-35 allows an entity to first perform an optional qualitative assessment for an indefinite-lived intangible asset other than goodwill to decide whether it is more likely than not that the asset is impaired. If the entity concludes it is not more likely than not, it may bypass the quantitative fair-value-versus-carrying-amount comparison for that testing cycle, similar to the analogous option available for goodwill. Option B misstates the standard: the entire purpose of the qualitative option is that it can substitute for quantitative testing when the more-likely-than-not threshold isn't met. Option C is wrong because passing a qualitative impairment assessment has no bearing on useful-life classification; whether an intangible asset's life is indefinite depends on separate cash-flow-generating factors, not on impairment test outcomes. Option D is wrong because indefinite-lived intangibles other than goodwill have always used a direct fair-value-to-carrying-amount comparison under ASC 350-30, unrelated to the goodwill-specific simplification made by ASU 2017-04.

Source: FASB ASC 350-30-35 (impairment testing of indefinite-lived intangible assets)

Why B? And why not the others?

Correct answer: B. No — US GAAP permits, but does not require, component depreciation for parts of an asset with differing useful lives; a company may instead depreciate the entire plant as a single unit using a composite or blended rate, unlike IFRS's IAS 16, which requires separate depreciation of significant components

Under US GAAP, component depreciation of property, plant, and equipment is permitted but not required: a company may split an asset into significant parts with different useful lives and depreciate each separately, or it may depreciate the whole asset as one unit using a composite rate. IFRS's IAS 16 takes the opposite position, requiring separate depreciation of each significant component with a materially different pattern of consumption or useful life. Option A wrongly states component depreciation as mandatory under US GAAP, which is the IFRS rule, not the GAAP rule. Option C is wrong because component depreciation is not prohibited under US GAAP; it remains an available accounting policy choice. Option D is wrong because no such public/private company distinction exists for component depreciation — the private company accounting alternatives address goodwill amortization, certain intangible assets, and hedge accounting, not PP&E componentization.

Source: US GAAP vs IFRS comparison (PP&E component approach); FASB ASC 360 has no component depreciation requirement

Why D? And why not the others?

Correct answer: D. The asset's total construction cost exceeds a $1 million capitalization threshold

ASC 835-20-25-3 requires all three of the following to be met simultaneously before interest cost qualifies for capitalization on a qualifying asset: expenditures for the asset have been made, activities necessary to prepare the asset for its intended use are in progress, and interest cost is being incurred. There is no dollar threshold in the standard — capitalization applies to any qualifying asset meeting the three conditions, regardless of the size of its total construction cost. Options A, B, and C are each genuine, correctly stated conditions from ASC 835-20-25-3, so selecting any of them as 'not a condition' would be incorrect since they are exactly the tests the standard requires. Option D is correct precisely because no such capitalization-threshold rule exists anywhere in ASC 835-20; it is a fabricated condition.

Source: FASB ASC 835-20-25-3 (conditions for capitalization of interest)

Why B? And why not the others?

Correct answer: B. Recognize an $80,000 asset retirement obligation liability with a corresponding increase to the carrying amount of the related long-lived asset (an asset retirement cost); in later periods, increase the liability through accretion expense, classified as an operating expense rather than interest expense

ASC 410-20 requires an entity to recognize the fair value of an asset retirement obligation in the period it is incurred, if a reasonable estimate can be made, with a corresponding increase to the carrying amount of the related long-lived asset as an asset retirement cost, which is then depreciated over the asset's life. In subsequent periods, the liability increases through accretion expense — computed using the credit-adjusted risk-free rate that existed at initial measurement — and this accretion is classified as an operating expense, not interest expense. Option A wrongly expenses the obligation immediately instead of capitalizing it, and wrongly labels the subsequent increase as interest expense at a floating current rate rather than accretion at the fixed historical rate. Option C is wrong because this is not a loss contingency deferred until work begins; it must be recognized when incurred and reasonably estimable. Option D is wrong because an asset retirement obligation is a liability paired with an asset, not an equity transaction routed through paid-in capital.

Source: FASB ASC 410-20-25 and 410-20-35 (recognition and subsequent measurement of asset retirement obligations)

Why B? And why not the others?

Correct answer: B. As a change in accounting estimate effected by a change in accounting principle, applied prospectively over the machine's remaining useful life, with no restatement of prior periods

ASC 250-10-45-17 specifically classifies a change in the depreciation, amortization, or depletion method for long-lived, nonfinancial assets as a change in accounting estimate effected by a change in accounting principle. Because separating the effect of the revised estimate of the asset's consumption pattern from the effect of adopting a new method is impracticable, the change is accounted for prospectively, like a pure change in estimate, over the asset's remaining useful life, with no restatement of prior periods. Option A applies the general retrospective-restatement treatment for ordinary changes in accounting principle, which ASC 250 specifically carves depreciation method changes out of. Option C is wrong because switching from one legitimate depreciation method to another is not a misapplication of GAAP, so error-correction guidance doesn't apply. Option D describes the impracticability cumulative-effect exception used for certain principle changes, such as inventory costing methods, when retrospective application genuinely cannot be done — not the rule for depreciation method changes, which are prospective by design, not because retrospective application happens to be impracticable.

Source: FASB ASC 250-10-45-17 (change in accounting estimate effected by a change in accounting principle)

Why B? And why not the others?

Correct answer: B. Record the land received at its $150,000 fair value and recognize a $50,000 gain, because the exchange has commercial substance: the economic positions of both parties change and their expected future cash flows differ significantly

Under ASC 845-10-30-3, gains and losses on nonmonetary exchanges are recognized unless the fair value of neither asset is determinable, the exchange is of similar inventory to facilitate sales to customers, or the exchange lacks commercial substance. Commercial substance exists when the economic positions of the parties are modified and their expected future cash flows change significantly, which is the case here, so Company X records the land received at its $150,000 fair value and recognizes a $50,000 gain ($150,000 minus the $100,000 carrying amount given up). Option A describes the carryover-basis treatment used only when an exchange lacks commercial substance, not this fact pattern. Option C invents a gain-deferral mechanism with no basis in ASC 845; a recognized gain is recorded at the exchange date, not amortized over a future holding period. Option D invents a 'lower of' measurement approach that is not part of the commercial-substance model, which simply measures at fair value and immediately recognizes the resulting gain or loss.

Source: FASB ASC 845-10-30-3 (recognition of gains and losses on nonmonetary exchanges)

Why B? And why not the others?

Correct answer: B. The FIFO pool must be written down to $460,000 under the lower of cost and net realizable value test; the LIFO pool remains subject to the older lower of cost or market test, comparing replacement cost to a ceiling of net realizable value and a floor of net realizable value less a normal profit margin

ASU 2015-11 replaced the lower of cost or market test with the lower of cost and net realizable value test, but only for inventory measured using methods other than LIFO or the retail inventory method, such as FIFO or average cost. Since the FIFO pool's net realizable value of $460,000 is below its $500,000 cost, it must be written down to $460,000. The LIFO pool was specifically carved out of this simplification and continues to apply the older lower of cost or market test, where market is replacement cost bounded by a ceiling of net realizable value and a floor of net realizable value less a normal profit margin. Option A is wrong because ASU 2015-11 did not eliminate all differences between methods; it created a bifurcated model where LIFO and retail-method inventory keep the old test. Option C is wrong because write-down testing was simplified, not eliminated. Option D reverses the rule: FIFO and average-cost pools are the ones using the newer lower-of-cost-and-net-realizable-value test, while LIFO and retail-method inventory keep the older test; neither is exempt from testing altogether.

Source: FASB ASC 330-10-35 as amended by ASU 2015-11 (Simplifying the Measurement of Inventory)

Why B? And why not the others?

Correct answer: B. $950,000 — the lower of (1) $970,000, the $1,000,000 pre-held-for-sale carrying amount reduced by the $30,000 of depreciation that would have been recognized for the six months had the building remained held and used, and (2) the $950,000 fair value at the date of the decision not to sell

ASC 360-10-35-44 requires that when a long-lived asset is reclassified from held for sale back to held and used, it be measured at the lower of (1) its carrying amount before it was classified as held for sale, adjusted for any depreciation or amortization expense that would have been recognized had it remained classified as held and used, or (2) its fair value at the date of the subsequent decision not to sell. Here the adjusted carrying amount is $1,000,000 minus $30,000 of hypothetical six-month depreciation, or $970,000, and fair value is $950,000, so the lower amount, $950,000, is used. Option A wrongly treats fair value as an automatic default rather than one side of a required lower-of comparison. Option C ignores the required remeasurement and the add-back of hypothetical depreciation that the standard mandates upon reclassification. Option D is wrong because full reversal to the original pre-impairment carrying amount is not permitted; the standard caps any recovery at the depreciation-adjusted carrying amount or fair value, whichever is lower, not an unconditional reset to original cost.

Source: FASB ASC 360-10-35-44 (measurement upon reclassification from held for sale to held and used)