A retail chain operates two adjacent stores inside the same shopping mall: a general-merchandise store and a specialty store. The two stores share a single loading dock and point-of-sale/inventory system, run combined promotions, and draw on shared inventory pools, so their cash inflows are not separately identifiable from each other. For purposes of testing leasehold improvements in the general-merchandise store for impairment under ASC 360, at what level should the company group its long-lived assets?
- The general-merchandise store's assets and liabilities alone, because each individual store location is always its own asset group under ASC 360
- The retail chain's assets and liabilities as a whole, because ASC 360 always requires impairment testing at the entity-wide level
- The general-merchandise store and the specialty store together, because ASC 360-10-35-23 requires long-lived assets to be grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, and here the two stores' cash flows are not independent of one another
- Whatever grouping management uses for its internal management reporting, because ASC 360 defers entirely to how a company organizes its internal segment reports
Why C? And why not the others?
Correct answer: C. The general-merchandise store and the specialty store together, because ASC 360-10-35-23 requires long-lived assets to be grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, and here the two stores' cash flows are not independent of one another
ASC 360-10-35-23 requires a long-lived asset to be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, for purposes of recognizing and measuring an impairment loss. Here the two stores share a loading dock, a combined point-of-sale and inventory system, joint promotions, and shared inventory pools, so their cash inflows cannot be separated from each other — the lowest level with largely independent cash flows is the two stores combined, not either store alone. The option treating each store as automatically its own asset group ignores the facts given and the standard's cash-flow-independence test, which can require combining locations when their cash flows are intertwined. The option requiring entity-wide grouping in all cases overstates the rule; entity-wide grouping is reserved for the limited situation (such as a corporate headquarters) where an asset has no identifiable cash flows independent of the whole entity, not a general default. The option deferring to internal management reporting invents a rule that does not exist in ASC 360; segment structure may inform the analysis but is not itself the determinative test — the cash-flow-independence criterion is.
Source: FASB ASC 360-10-35-23 (grouping of long-lived assets for impairment testing)