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ASC 350 vs. ASC 360 Impairment Models

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Updated
Byrootzero_admin2021

With the impact of COVID on the economy, impairments have become a focal point. When things are going bad, it creates pressure on a company’s long-lived assets, and impairment may need to be assessed each reporting period. The SEC has focused on transparent disclosures of not only recorded impairments, but potential impairments. 

There is no one-size-fits-all model for impairment. While the objective of impairment testing is the same for all assets, the accounting models for impairment differ based on the nature and type of asset. Therefore, it is critical to determine the appropriate model upfront. Financial and current assets (i.e. inventory) have their own impairment models, which are not discussed in this article. The main focus of this article is on impairment related to long-lived assets, which includes goodwill, intangible and tangible long-lived assets that are held-and-used. Among long-lived assets, there are 2 different accounting models.

Impairment models

The following guidance dictates the accounting for the different types of assets:

  • ASC 350- governs indefinite-lived intangibles and goodwill 
  • ASC 360- governs long-lived assets and finite-lived intangible assets

Order of impairment testing

If goodwill and other assets are assessed for impairment at the same time, the following is the order of assets to be assessed for impairment:

  1. Other assets (i.e. accounts receivables, inventory, investments) under applicable guidance 
  2. Indefinite-lived intangibles under ASC 350
  3. Long-lived assets- under ASC 360
  4. Goodwill- ASC 350

Goodwill is assessed for impairment last because it is tested at the reporting unit level, which includes all the aforementioned assets in the reporting unit’s carrying value. 

A comparison of accounting models

 

ASC 350

ASC 360

Scope

Goodwill and indefinite-lived intangibles

Finite-lived intangibles and long-lived tangible assets, including right-of-use assets and capitalized software

Unit of accounting

Goodwill- reporting unit level (operating segment or one level below operating segment). 

 

Indefinite-lived intangibles are at the individual asset level 

Asset grouping level (lowest level of identifiable cash flows)

Frequency

At least annually, or more frequently if a triggering event has occurred

Only if a triggering event has occurred

Impairment indicators

  • A deterioration in macroeconomic conditions, including general economic condition, access to capital, foreign exchange rate volatility, etc.
  • A deterioration in the entity’s industry and market 
  • Increases in costs including materials and labor
  • A decline in overall financial performance including negative or declining cash flows 
  • Other relevant entity-specific events including bankruptcy, litigation, changes in management, strategy, etc.
  • Changes in the composition or carrying amount of a reporting unit
  • A sustained decrease in share price
  • A significant decrease in the market price 
  • A significant adverse change in the extent or manner in which an asset/asset group is being used or its physical condition
  • A significant adverse change in the legal or business climate, including an adverse action by a regulator
  • An accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset/asset group
  • A current-period operating/cash flow loss combined with a history of operating/cash flow losses or forecasted continuing losses 
  • Current expectation that, more likely than not, an asset group will be sold or otherwise disposed of significantly before the end of its estimated useful life.

Impairment test

Optional qualitative analysis (when no significant change in fair value and carrying value); or

 

One step quantitative analysis- compare fair value to carrying value (with the adoption of ASU 2017-04)

2-step quantitative test:

 

  1. Recoverability analysis- compare sum of undiscounted cash flows to carrying value. 
  2. If fail recoverability test- compare fair value to carrying value

Measurement of impairment loss

The amount by which fair value exceeds carrying value (up to the amount of goodwill recorded)

The amount by which fair value exceeds carrying value 

Public company considerations

Perform a market cap reconciliation of reporting units

N/A

Private company alternatives

Election to only test impairment when there is a triggering event and only assess if there is a triggering event at the reporting date.

N/A

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