There are multiple reasons and ways to dispose of a long-lived asset or asset group. The accounting for disposals of long-lived assets falls under ASC 360, Property, Plant and Equipment. While ASC 360 also covers long-lived assets to be held and used, this article only covers the disposals of long-lived assets.

Long-lived assets to be disposed of other than by sale

Long-lived assets not to be sold are either abandoned, exchanged, or distributed to owners in a spin-off. These assets continue to be classified as held and used until they are disposed of. The accounting for each type of transaction is as follows:

Abandonment

The abandonment date is when the asset ceases to be used. If the asset or facility is abandoned before its estimated useful life, the depreciation useful life should be shortened and accounted for as a change in estimate under ASC 250, Accounting Changes and Error Corrections. Abandonment of an asset before its useful life is also an indicator of impairment, and the company should go through the impairment model under ASC 360 to determine if the asset group is recoverable.  

Nonmonetary Exchange

In certain cases, the asset is exchanged for another nonmonetary asset. The asset being exchanged is classified as held and used until the exchange occurs. When the exchange happens, the nonmonetary exchange will be measured at fair value, and the company will recognize a gain or loss. However, if the nonmonetary exchange meets any of the criteria in ASC 845-10-30-3 below, it is measured at the carrying value of the asset being relinquished:

• The fair value of either asset being relinquished or received is not determinable
• The transaction is between assets being held for sale in the same line of business to facilitate sales to customers
• The transaction lacks commercial substance

Distribution to Owners in a Spin-off

In a spin-off transaction, the assets are distributed to the owners of the spun-off business for no consideration in a nonreciprocal transaction. The assets should continue to be classified as held and used until the distribution. Since the assets will be disposed of before their useful life, the company should first consider whether there is an indicator of impairment and test the asset group for recoverability. If the carrying amount of the assets is less than the fair value, an impairment loss should be recognized.

Long-lived assets to be disposed of by sale

Long-lived assets to be disposed of by sale have accounting implications before the sale happens.

Held for Sale Criteria

For long-lived assets that are to be sold, the company should first consider if the following held for sale criteria under ASC 360-10-45-9 are met:

• Management commits to a plan to sell the asset (group)– the plan is documented, and management has the proper authority, or the appropriate authority (board of directors) approves the plan.
• The asset (group) is available for immediate sale in its present condition– the company has the intent and ability to sell the asset in its current condition, subject only to terms and conditions that are usual or customary for the sale of such assets.
• An active program has been initiated to locate a buyer– this includes hiring a sales agent or dedicating certain staff to marketing the asset for sale.
• The sale is probable and expected to be completed within one year– this criterion requires judgment as the company must determine the likelihood of a sale being completed. Probable is generally considered 75% likely to occur. The determination should be based on market knowledge and past sales experience of similar assets. If the time to complete the sale extends beyond a year due to circumstances beyond the company’s control, the assets can continue to be classified as held for sale.
• The asset (group) is being actively marketed at a reasonable proxy of its fair value– The price of the asset may indicate whether the company has the intent and ability to sell the asset. For example, if the price of the asset is being marketed at a reasonable proxy of its fair value, this usually indicates that the asset is available for immediate sale. Conversely, if the price is less than fair value, the asset may not be available for immediate sale.
• Significant changes to the plan are unlikely to occur– the company should consider if it has had a history of changing plans or withdrawing plans for long-lived assets.

If the held for sale criteria are met after the balance sheet date, but prior to the issuance of the financials, the asset (group) should continue to be classified as held and used in the balance sheet, with additional disclosures in the footnotes.

Measurement

The asset (group) should be reported at the lower of its fair value less costs to sell or its carrying value in the period that the held for sale criteria are met. Fair value is calculated in accordance with the principles of ASC 820, Fair Value Measurement. Costs to sell are incremental direct costs to complete the sale, including commissions, legal fees, title transfer fees, and other closing costs. A loss is recognized when the asset’s carrying amount is less than its fair value.

The fair value less costs to sell should be calculated each reporting period. Any subsequent changes to the fair value less costs to sell are reported as a gain or loss, with an adjustment to the carrying amount not to exceed the original carrying amount. Depreciation is not recorded while the asset is classified as held for sale.

The asset group represents all the assets to be disposed of and liabilities to be transferred as a group in a single transaction. Goodwill should be allocated to the disposal group based on the relative fair value of the portion of the reporting unit being disposed of. Before measuring the asset (group) at the lower of its fair value less costs to sell or its carrying value, the assets to be disposed of should be adjusted for any impairment or asset valuation in accordance with their respective GAAP guidance. In addition, any cumulative translation adjustments related to an equity method investment or consolidated investment in a foreign entity should be included in the asset’s carrying value and classified as equity until disposed of.

If the company no longer decides to sell the asset (group), the asset (group) should be reclassified as held and used and measured at the lower of either 1) its carrying amount before it was classified as held for sale, adjusted for depreciation and amortization, or 2) the fair value at the date the decision was made not to sell.

Presentation

The assets and liabilities classified as held for sale that are not considered discontinued operations should be presented separately on the balance sheet by major class of assets and liabilities.

Derecognition

The company must determine which guidance to apply for the disposal transaction. If the counterparty is a customer, the company must apply ASC 606, Revenue from Contracts with Customers. If the asset group being transferred qualifies as a “business” under ASC 805, Business Combinations, then ASC 810, Consolidation should be applied. If the transaction qualifies as a Transfer or Servicing of financial assets, ASC 860, Transfer and Servicing should be applied. If none of the above apply, the disposal should be accounted for under ASC 610-20, Other Income- Gains and Losses from the Derecognition of Nonfinancial Assets.

Under ASC 610-20, any unrecognized gain or loss from the sale of the asset (group) is recognized on the disposal transaction date. The cumulative translation adjustment related to any equity method investment or investment in a foreign entity previously recorded in equity is included in the gain or loss.

Discontinued Operations

Any disposals of long-lived assets should be assessed to determine whether they meet the criteria for discontinued operations. If they meet the criteria, the company must follow the disclosure and reporting requirements of ASC 205-20, Presentation of Financial Statements – Discontinued Operations. The reporting requirements for discontinued operations are meant to provide investors with information on the impacts of the disposal on the company’s ongoing operations. A disposal is considered a discontinued operation if it represents a strategic shift that has a major effect on the company’s operations and financing results when:

• A component of the company meets the criteria to be classified as held for sale
• A component of the company is disposed of by sale
• A component is disposed of other than by sale

A component is considered any operations or cash flows that are distinguishable from the rest of the company. It can be a reportable segment, operating segment, reporting unit, subsidiary, or asset group. A strategic shift includes a major geographical area or line of business. A qualitative and quantitative analysis must be performed to determine if the strategic shift has a major effect on the company’s operations. ASC 205-20 does not provide bright line thresholds for what constitutes a “major effect.” However, based on the examples provided, a major effect would be considered 15% of total revenue, 20% of total assets, or 15% of total net income.

Presentation

If a discontinued operation is classified as held for sale, the company must present the assets and liabilities of the discontinued operations separately on the current balance sheet as well as the comparative balance sheet (by current and noncurrent assets and liabilities at a minimum). The major classes of assets and liabilities should be either broken out on the balance sheet or in the notes to the financial statements for both the current and comparative periods.  If disclosed in the notes, the amounts must be reconciled to the balance sheet.

In the period that the criteria are met for discontinued operations, the income statement should break out the component’s results of operations as discontinued operations for both the current period as well as any comparative periods presented. Impairment charges related to the component should be included in discontinued operations. Any interest expense or amortization related to debt assumed by the buyer and becomes due as a result of the disposal transaction should be allocated to discontinued operations. Only direct expenses incurred by the component should be included in discontinued operations (i.e., no overhead allocation). Companies may present discontinued operations as a single line-item net of tax and disclose the amount of tax in the notes. If the company and the component have intercompany sales that are eliminated in consolidation (excluding inventory that has not yet been sold to third-party customers), these transactions should be grossed up and allocated between continuing operations and discontinued operations. If the company enters into a transition service agreement to continue providing services to the component, the amounts associated with the transition services should be reported in the company’s continuing operations.

Disclosure

ASC 205-20-50-1 requires the following disclosures for a discontinued operation:

• A description of the facts and circumstances around the disposal and the expected manner and timing of the disposal
• The gain or loss recognized if it is not separately presented on the income statement
• The segment that the discontinued operation is reported under.