Impairment Issues and Accounting Codes Essay

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FASB ASC (360-10-35-21), a long-lived asset that undergoes a change can be tested for recoverability. A decrease in market price could trigger this event. An adverse change could trigger it, and so on. For the case described by Persellin et al. (2014), either of these two events could be used to test the land's recoverability. An impairment event has more than likely occurred.



According to 360-10-35-31, a "primary asset of an asset group cannot be land" -- which means that guidelines are going to be different for this process. Moreover, impairment guidelines for assets held for sale versus assets held for use will have to follow the dictate in 360-10 that stipulates that impairment charges must reverse if there is a change in the use of the asset. Thus, if the asset is being used or sold will make a difference.



Fair value can be determined by ASC 820, which states that "fair value is the price to sell an asset or transfer a liability and, therefore, represents an exit price, not an entry price." Thus, the $10 million offer may be used as an exit price and must not reflect the fair value unless it is the exit price in the principal market -- or most advantageous market. It is thus a market-based measurement. Valuation methodologies should be used to assess fair value -- namely, the market approach, the income approach and the cost approach.

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Additionally, paragraphs 360-10-45-9 through 45-11 can be used as a guide in this matter if the asset is considered a long-lived asset classified as held for sale.



Part II



4. IN6 discusses measuring value in use and that the "price for bearing the uncertainty inherent in the asset" should be reflected in the calculation of an asset's value in use; IAS 36-11 provides that "the ability of an intangible asset to generate sufficient future economic benefits to recover its carrying amount is usually subject to greater uncertainty before the asset is available for use than after." An impairment loss should be recognized based on the calculations that projected sale of the asset is to be 2.5 million dollars under either of the respective values attributed to the land.



5. No, an impairment should not be made because the sale has not closed and in real estate transactions, until the sale closes nothing is certain -- therefore adjusting the impairment loss at the end of 2015 would be premature. It is better to await the closure of the sale and adjust for that quarter.



6. 360-10-35-22 may be used for property, plant and equipment depreciation estimates and this while 350-30-35-1 through 35-5 may be used to determine the usefulness of the intangible asset, which, in this case is appropriate….....

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References


IAS Standard 36. Impairment of Assets.

Persellin, J., Shaub, M., Wilkins, M. (2014). Arachnophobia: A case on impairment and accounting ethics. Issues in Accounting Education, 29(4): 577-586.

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