A machine is classified as held for sale on March 1, with a carrying amount at that date of $400,000 and a fair value less costs to sell of $370,000, resulting in an immediate $30,000 write-down. By the next reporting date, June 30, the machine's fair value less costs to sell has declined further to $340,000; it is still classified as held for sale and has not yet been sold. Under ASC 360-10-35-40, how should the company account for the change in fair value less costs to sell between March 1 and June 30?
- No further adjustment is made until the machine is actually sold, because ASC 360-10-35-40 only requires a write-down at the initial date of held-for-sale classification, not at subsequent reporting dates
- The company reverses the original $30,000 write-down and restores the machine to its original $400,000 carrying amount, because losses on assets held for sale cannot be increased once initially recognized
- The company recognizes an additional $30,000 loss, reducing the machine's carrying amount from $370,000 to $340,000, because ASC 360-10-35-40 requires the carrying amount of an asset classified as held for sale to be remeasured at each subsequent reporting period at the lower of its carrying amount or its fair value less costs to sell, with any further decline recognized as an additional loss
- The company recognizes the $30,000 additional decline as an unrealized loss in other comprehensive income rather than in earnings, consistent with the treatment of temporary fair-value declines on available-for-sale securities
Why C? And why not the others?
Correct answer: C. The company recognizes an additional $30,000 loss, reducing the machine's carrying amount from $370,000 to $340,000, because ASC 360-10-35-40 requires the carrying amount of an asset classified as held for sale to be remeasured at each subsequent reporting period at the lower of its carrying amount or its fair value less costs to sell, with any further decline recognized as an additional loss
ASC 360-10-35-40 does not treat the write-down at the date of initial held-for-sale classification as a one-time event; it requires the carrying amount of an asset classified as held for sale to be remeasured at each subsequent reporting period at the lower of its carrying amount or its fair value less costs to sell, with any further decline in fair value less costs to sell recognized as an additional loss for as long as the asset remains classified as held for sale and unsold. Here the machine's fair value less costs to sell fell from $370,000 to $340,000 between the two reporting dates, so the company recognizes an additional $30,000 loss and reduces the carrying amount to $340,000. The option treating the initial write-down as the only required adjustment ignores that the standard mandates remeasurement at every subsequent reporting period, not just once at classification. The option reversing the original write-down and restoring the $400,000 carrying amount is backwards: the standard does allow gains for later fair-value increases, but only up to the amount of cumulative losses previously recognized, and here fair value declined further rather than recovering, so no reversal is applicable at all. Routing the additional decline through other comprehensive income misapplies available-for-sale securities accounting, which has no bearing on held-for-sale long-lived assets; losses and any permitted subsequent gains on held-for-sale assets are recognized in earnings, not OCI.
Source: FASB ASC 360-10-35-40 (a loss shall be recognized for any initial or subsequent write-down to fair value less cost to sell of an asset classified as held for sale, remeasured at each reporting period)