Asset impairment and disposal: new accounting guidance for long-lived assets.

EXECUTIVE SUMMARY

* TO ESTABLISH A SINGLE MODEL BUSINESSES CAN follow, FASB issued Statement no. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. FASB intends it to resolve implementation issues that arose from its predecessor, Statement no. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,

* IMPAIRMENT EXISTS WHEN THE CARRYING AMOUNT of a long-lived asset or asset group exceeds its fair value and is nonrecoverable. CPAs should test for impairment when certain changes occur, including a significant decrease in the market price of a long-lived asset, a change in how the company uses an asset or changes in the business climate that could affect the asset's value.

* FAIR VALUE IS THE AMOUNT AN ASSET COULD be bought or sold for in a current transaction between willing parties. Quoted prices in active markets are the best evidence of fair values. Because market prices are not always available, CPAs should base fair-value estimates on the best information available or use valuation techniques such as the expected-present-value method or the traditional-present-value method.

* WHEN A COMPANY RECOGNIZES AN IMPAIRMENT loss for an asset group, it must allocate the loss to the assets in the group on a pro rata basis. It must also disclose in the notes to the financial statements a description of the impaired asset and the facts and circumstances leading to the impairment.

* COMPANIES MUST PRESENT LONG-LIVED ASSETS HELD for sale separately in the financial statements and not offset them against liabilities. Statement no. 144 requires certain disclosures in the notes to the financial statements including the circumstances leading to the disposal, the manner and timing and the gain or loss on sale.

For many years, companies and other entities accounted for the disposal or expected disposal of long-lived assets that were a segment of a business using one set of rules and the disposal of long-lived assets that were not a segment of a business using another standard. To establish a single model for all long-lived assets, FASB issued Statement no. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

The new standard supersedes Statement no. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and a portion of APB Opinion no. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary Unusual and Infrequently Occurring Events and Transactions. FASB intends Statement no. 144 to resolve significant implementation issues that arose from Statement no. 121. This article explains the new guidance and how CPAs can implement it.