Academic journal article Journal of Accountancy

FASB Issues Statement on Asset Impairment

Academic journal article Journal of Accountancy

FASB Issues Statement on Asset Impairment

Article excerpt

The Financial Accounting Standards Board has issued Statement no. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which provides guidance for determining whether there is an impairment loss. The statement applies to financial statements for fiscal years beginning after December 15, 1995.

According to FASB practice fellow Carmen Bailey, "The conceptual model in the exposure draft of this statement has not changed, although some additional guidance is given, based on comments the board received concerning treatment of leased assets, real estate companies and not-for-profit organizations." The statement requires that assets and certain identifiable intangibles to be held and used must be reviewed for impairment whenever there is an indication that the carrying amount of a given asset may not be recoverable.

"An entity will have to estimate future cash flows expected to result from using the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, there is an impairment loss. That loss is measured by the difference between the asset's fair value and its carrying amount," said Bailey.

Assets to be disposed of, with certain exceptions, will be reported at the lower of cost or fair value less the cost to sell the asset. The statement also requires that a rate-regulated enterprise recognize an impairment for the amount of costs excluded when a regulator excludes all or part of a cost from the enterprise's rate base.

Statement no. 121 should improve financial reporting by making it easier to compare one entity's response to economic or other forces with another entity's response, the board added. …

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