A company has a capitalized contract-cost asset with a carrying amount of $18,000 related to a contract. At the reporting date, the company expects to receive $50,000 of remaining consideration under the contract and expects to incur $37,000 of remaining costs that relate directly to providing the remaining goods and services. Under ASC 340-40-35-3, what impairment loss, if any, should the company recognize?
- No impairment loss, because the remaining consideration of $50,000 exceeds the $18,000 carrying amount
- An impairment loss of $5,000, because the $18,000 carrying amount exceeds the $13,000 difference between the $50,000 of remaining consideration and the $37,000 of remaining direct costs
- An impairment loss of $18,000, because the entire carrying amount must be written off once any remaining direct costs are identified
- An impairment loss of $32,000, because the carrying amount must be compared directly to the $50,000 of remaining consideration alone, ignoring the remaining direct costs
Why B? And why not the others?
Correct answer: B. An impairment loss of $5,000, because the $18,000 carrying amount exceeds the $13,000 difference between the $50,000 of remaining consideration and the $37,000 of remaining direct costs
ASC 340-40-35-3 requires recognizing an impairment loss to the extent the carrying amount of a contract-cost asset exceeds the remaining amount of consideration the entity expects to receive in exchange for the related goods or services, minus the costs directly related to providing those goods or services that have not yet been recognized as expenses; here that net amount is $50,000 minus $37,000, or $13,000, which is less than the $18,000 carrying amount, so a $5,000 impairment loss must be recognized for the excess. Comparing the carrying amount only to the gross $50,000 of remaining consideration and concluding there is no impairment ignores that the test nets out the remaining direct costs still to be incurred, which is exactly what makes the net recoverable amount fall below the carrying amount in this case. Writing off the entire $18,000 carrying amount whenever any remaining direct costs exist misreads the test as an all-or-nothing trigger rather than the excess-over-net-recoverable-amount calculation the standard actually specifies. Comparing the carrying amount to the $50,000 of remaining consideration while ignoring the $37,000 of remaining direct costs entirely produces a result that does not reflect how the two-part test in 35-3 is structured.
Source: FASB Accounting Standards Codification: ASC 340-40-35-3, Other Assets and Deferred Costs — Contracts with Customers