A company classified a building as held for sale on January 1, with a pre-classification carrying amount of $1,000,000 and straight-line depreciation of $60,000 per year. It wrote the building down to its fair value less costs to sell of $880,000, and depreciation ceased while the building was classified as held for sale. On July 1 of the same year, six months later, management abandons the plan to sell and reclassifies the building back to held and used. At that date, the building's fair value is $950,000. Under ASC 360-10-35, at what amount should the building be recorded upon reclassification to held and used?
- $950,000, its current fair value, because assets reclassified out of held for sale are always recorded at the fair value determined on the date of the decision not to sell
- $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
- $880,000, the amount at which the building was written down when classified as held for sale, carried forward unchanged since depreciation was suspended during that period
- $1,000,000, the original pre-classification carrying amount, because reclassification to held and used fully reverses the earlier held-for-sale write-down
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)