A manufacturer's plant has experienced a significant decline in local demand for its product over the past two years, resulting in a current-period operating loss at the plant combined with a history of operating losses there and no realistic projection of profitability at that location in the foreseeable future. Under ASC 360-10-35-21, does this fact pattern represent an indicator that the plant's long-lived assets should be tested for recoverability, and if so, what is the next required step?
- No indicator is present, because ASC 360 only requires impairment testing at fixed calendar intervals, such as annually, rather than in response to events or changes in circumstances
- Yes: a current-period operating or cash flow loss combined with a history of such losses, or a projection of continuing losses, is one of the specific examples of an impairment indicator identified in ASC 360-10-35-21; because an indicator is present, the company must test the asset group for recoverability by comparing its carrying amount to the sum of the estimated undiscounted future cash flows expected from its use and eventual disposal
- Yes, an indicator is present, and because an indicator exists, the company must immediately write the asset group down to fair value without first performing any undiscounted cash flow recoverability test
- No, because operating losses relate to the income statement and are irrelevant to whether long-lived assets reported on the balance sheet might be impaired under ASC 360
Why B? And why not the others?
Correct answer: B. Yes: a current-period operating or cash flow loss combined with a history of such losses, or a projection of continuing losses, is one of the specific examples of an impairment indicator identified in ASC 360-10-35-21; because an indicator is present, the company must test the asset group for recoverability by comparing its carrying amount to the sum of the estimated undiscounted future cash flows expected from its use and eventual disposal
ASC 360-10-35-21 lists specific examples of events or changes in circumstances indicating that the carrying amount of a long-lived asset (asset group) may not be recoverable, one of which is a current-period operating or cash flow loss combined with a history of operating or cash flow losses associated with the use of the asset, or a projection or forecast demonstrating continuing losses. That is exactly the fact pattern here, so an impairment indicator is present, which triggers (rather than skips) the recoverability test: the asset group's carrying amount is compared to the sum of the estimated undiscounted future cash flows expected from its continued use and eventual disposal, and only if the carrying amount exceeds that undiscounted sum does the entity proceed to measure and recognize an impairment loss based on fair value. The option requiring only fixed-interval testing ignores that ASC 360 is fundamentally an indicator-triggered, event-driven model for long-lived assets held and used, unlike the annual testing required for goodwill. The option jumping straight to a fair-value write-down skips the required first step of comparing carrying amount to undiscounted cash flows, which is mandatory before any fair-value-based loss can be measured. The option treating operating losses as irrelevant to asset carrying amounts contradicts the standard's own list of indicators, which explicitly includes operating and cash flow losses as evidence bearing on recoverability.
Source: FASB ASC 360-10-35-21 and 360-10-35-17 (indicators of impairment and the undiscounted cash flow recoverability test for long-lived assets held and used)