In its first quarter, a company recognizes a $4,000 impairment loss on a capitalized contract-cost asset because remaining expected consideration net of remaining direct costs had fallen below the asset's carrying amount. By the third quarter, the customer's outlook has improved significantly, and the net recoverable amount under the same test would now support a carrying amount higher than what remains on the books after the earlier write-down and ordinary amortization. Under ASC 340-40, may the company reverse any part of the $4,000 impairment loss it recognized in the first quarter?
- No, ASC 340-40 does not permit reversing a previously recognized impairment loss on a contract-cost asset, even if the conditions that caused the impairment later improve
- Yes, the company must reverse the impairment loss to the extent supported by the improved net recoverable amount, consistent with the loss-recognition test itself
- Yes, but only if the company also restates its prior-period financial statements to remove the original impairment loss entirely
- It depends on whether the company elected fair value accounting for the contract-cost asset at initial recognition
Why A? And why not the others?
Correct answer: A. No, ASC 340-40 does not permit reversing a previously recognized impairment loss on a contract-cost asset, even if the conditions that caused the impairment later improve
Once an impairment loss on a contract-cost asset has been recognized under ASC 340-40, the guidance does not permit reversing that loss in a later period even if the conditions that caused the impairment subsequently improve, which differs from some other impairment or fair-value models that do allow later reversals; the improved third-quarter outlook here does not create any basis to write the asset back up. Requiring a reversal to the extent supported by the improved net recoverable amount describes an approach the standard specifically does not adopt for this asset. Restating prior-period financial statements is not the mechanism at issue at all, since the original impairment loss was correctly recognized based on the facts known at that time, so there is nothing to restate; the only question is whether a later improvement permits a new write-up, and it does not. There is also no fair-value election available for contract-cost assets under ASC 340-40 that would change this outcome; these assets are accounted for at capitalized cost less accumulated amortization and impairment, not at fair value.
Source: FASB Accounting Standards Codification: ASC 340-40-35, Other Assets and Deferred Costs — Contracts with Customers