A company holds an asset group classified as held and used with a carrying amount of $500,000. Management estimates the group will generate undiscounted future cash flows of $560,000 over its remaining life through continued use and eventual disposal, but the asset group's current fair value is only $430,000. Under ASC 360-10-35, what should the company recognize?
- An impairment loss of $70,000, because the carrying amount exceeds fair value
- 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
- An impairment loss of $70,000, but only if the fair value shortfall persists for two consecutive reporting periods
- An impairment loss of $130,000, the difference between the undiscounted cash flows and fair value
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)