In March, a manufacturer commits to a plan to abandon a production line by year end because it has become technologically obsolete. The equipment will simply be scrapped when abandoned — there is no plan to sell or exchange it. The equipment remains in active use, producing output, throughout the eight months between the commitment date and the actual abandonment. Under ASC 360-10-35-47, may the equipment be classified as held for sale during those eight months, and how is depreciation handled?
- Yes, the equipment must be reclassified as held for sale as soon as the abandonment plan is committed, and depreciation ceases immediately upon that commitment
- No — a long-lived asset to be abandoned continues to be classified as held and used until it is actually disposed of (that is, until it ceases to be used); depreciation continues, but the useful life estimate is revised to reflect the shortened remaining period of use
- Yes, because committing to a plan to abandon an asset is treated identically to committing to a plan to sell it under ASC 360-10-45-9
- No, the equipment remains classified as held and used, but depreciation is suspended from the commitment date because the asset is no longer expected to generate future benefits
Why B? And why not the others?
Correct answer: B. No — a long-lived asset to be abandoned continues to be classified as held and used until it is actually disposed of (that is, until it ceases to be used); depreciation continues, but the useful life estimate is revised to reflect the shortened remaining period of use
ASC 360-10-35-47 provides that a long-lived asset to be disposed of other than by sale — including by abandonment — continues to be classified as held and used until it is actually disposed of, which for an abandoned asset means until it ceases to be used. Because the equipment here keeps operating for eight months after the commitment date, it stays held and used and continues to be depreciated throughout that period; what changes is that the company must revise its useful life and depreciation estimate to reflect the now-shortened remaining period the equipment will actually be used, consistent with the general principle that a change in estimated useful life is accounted for prospectively. The option requiring immediate reclassification to held for sale and immediate cessation of depreciation wrongly applies the held-for-sale model, which under ASC 360-10-45-9 requires criteria such as being available for immediate sale and actively marketed — criteria that make no sense for an asset that will simply be scrapped in place while still operating. The option equating an abandonment commitment with a sale commitment ignores that ASC 360 explicitly treats disposal by abandonment differently from disposal by sale; held-for-sale classification is reserved for assets meeting the sale-specific criteria. The option suspending depreciation while keeping the asset held and used contradicts the standard: depreciation continues over the revised, shortened useful life precisely because the asset remains in productive use until abandonment.
Source: FASB ASC 360-10-35-47 (long-lived assets to be disposed of other than by sale, including abandonment)