Fixed Asset Impairment: Testing, Measurement, and Journal Entry

Fixed asset impairment is the accounting write-down you record when a piece of property, plant, or equipment can no longer generate enough economic benefit to support its book value. Under ASC 360, you don’t test on a schedule the way you would for goodwill. You test when something triggers the question, and you follow a two-step model: first a recoverability screen using undiscounted cash flows, then, if the asset fails that screen, a measurement step that writes it down to fair value.

When You Have to Test

ASC 360-10-35-21 identifies six categories of events or changes in circumstances that require an immediate impairment review. Management is expected to watch for them continuously, not save the check for year-end.

A significant, unexpected drop in the asset’s market price.
A change in how the asset is used or in its physical condition, including being repurposed, idled, or damaged.
An adverse shift in the legal or business climate, such as new regulations, an unfavorable regulatory action, or a major industry downturn.
Cost overruns significantly above what was budgeted to acquire or construct the asset.
Current-period operating or cash flow losses combined with a history or forecast of continuing losses tied to the asset.
An expectation, more likely than not, that the asset will be sold or otherwise disposed of well before the end of its estimated useful life.

Any one of these sends you straight into step one. Waiting for the next reporting period isn’t an option.

Step One: The Recoverability Test

The recoverability test is a screening gate. It asks whether the asset will at least pay for itself in absolute dollars over the rest of its life. You compare the carrying value (original cost minus accumulated depreciation) to the total undiscounted cash flows the asset is expected to generate through continued use and eventual disposal.¹

Those cash flows include the inflows the asset helps produce, net of the outflows needed to keep it running (maintenance, labor, and similar costs). The single most important detail is what the test leaves out: you do not discount the cash flows for the time value of money. The screen is intentionally generous. It only asks whether the raw dollars cover the book value.

If undiscounted cash flows exceed carrying value, the asset passes. No impairment exists and the analysis ends.
If undiscounted cash flows fall below carrying value, the asset fails and you move to step two.

When an individual asset doesn’t produce cash flows on its own, you test it as part of an asset group, defined as the smallest collection of assets whose cash flows are largely independent of other assets in the business. A single production line inside a larger factory is a typical example. The comparison is then between the group’s combined carrying value and its combined cash flows.

Step Two: Measuring the Loss

Once an asset fails the recoverability test, the write-down is the difference between what’s on the books and what the asset is worth today:

Impairment Loss = Carrying Value − Fair Value

That’s it for the math.¹ The work is in determining fair value.

A Worked Example

A company owns a specialized packaging machine. It cost $800,000, and $300,000 of depreciation has been recorded, so carrying value is $500,000. Consumer demand shifts, the product line is losing money, and management identifies a triggering event.

Projected undiscounted net cash flows for the machine’s remaining life total $420,000. That’s less than the $500,000 carrying value, so the machine fails the recoverability test.

Management then estimates fair value using a discounted cash flow model and arrives at $350,000. The impairment loss is $500,000 minus $350,000, or $150,000. The machine’s new carrying value is $350,000, and the $150,000 loss hits the current-period income statement.

Why the Two Steps Use Different Cash Flow Methods

The gap between undiscounted and discounted cash flows is deliberate. The recoverability screen uses undiscounted numbers precisely because it’s meant to be forgiving — it ignores the cost of capital entirely and only asks whether the company can get its dollars back in nominal terms. Fair value measurement uses discounted cash flows or market prices to reflect what a buyer would actually pay today. An asset can clear the recoverability hurdle and still be worth far less than book value; the screen is not calibrated to catch that.

Determining Fair Value

Fair value under ASC 820 is the price you’d receive to sell the asset in an orderly transaction between market participants. The standard ranks the inputs you use into three levels:²

Level 1 is quoted prices in active markets for identical assets, used unadjusted. Auction results for common heavy equipment are the classic case.
Level 2 is observable inputs for similar assets: quoted prices for comparables or recent sale data you can see directly.
Level 3 is unobservable inputs, meaning internal models such as discounted cash flow analysis.

Most fixed asset impairments land at Level 3. Specialized manufacturing equipment, single-purpose buildings, and custom installations rarely have active resale markets. That puts significant weight on management’s cash flow projections and its choice of discount rate, and auditors will push on both. The discount rate should reflect the risks specific to the asset, including the uncertainty in the projections themselves.

Allocating the Loss Within an Asset Group

When the test was run at the group level, the calculated loss is allocated among the long-lived assets in the group in proportion to their relative carrying amounts.¹

There’s a floor: no individual asset can be written below its own fair value, provided that fair value can be determined without excessive cost. If an asset hits that floor before absorbing its full pro-rata share, the excess loss is reallocated to the remaining assets in the group.

Recording the Write-Down

The Journal Entry

You debit an impairment loss account and credit either accumulated depreciation or the asset account directly. ASC 360 doesn’t mandate either method. A common approach for the packaging machine example above would debit Impairment Loss $150,000 and credit Accumulated Depreciation $150,000, taking accumulated depreciation from $300,000 to $450,000 and net book value from $500,000 to $350,000. Some companies instead zero out the existing accumulated depreciation and reduce gross cost directly to the new fair value. The net carrying amount comes out the same either way.

Where It Goes on the Income Statement

The loss belongs in income from continuing operations, before income taxes. If the statement carries an operating income subtotal, the impairment sits above that line.³ Material amounts are often broken out on their own line. Because the entry is non-cash, it reduces net income without touching operating cash flow in the current period.

Footnote Disclosures

The footnotes have to give readers enough to evaluate the write-down. At a minimum, disclose a description of the asset or group, the facts and circumstances that triggered the loss, the amount recognized, and the method used to determine fair value.⁴ When fair value came from a discounted cash flow model, the disclosure should include the key assumptions, including the discount rate. Level 3 measurements involve the most management judgment and the least market validation, and the disclosures are where that shows.

Life After the Write-Down

The reduced carrying value becomes the asset’s new cost basis. Future depreciation is calculated on that lower amount over the remaining useful life, so periodic depreciation expense drops. In the packaging machine example, the company would depreciate $350,000 over whatever life is left.

US GAAP prohibits reversing an impairment on a fixed asset that continues to be held and used. Even if the market recovers or the product line becomes profitable again, the reduced carrying amount is permanent.¹ The rule exists to prevent companies from writing assets down in bad years and back up in good ones. IFRS handles this differently under IAS 36, but if you’re reporting under US GAAP, the door is closed.

The Held-for-Sale Exception

The no-reversal rule has one meaningful exception. Once you commit to selling an asset rather than continuing to use it, the accounting model changes. To qualify as held for sale, all six of the following criteria have to be met in the same period:⁵

Management with the authority to act has approved a plan to sell.
The asset is available for immediate sale in its current condition, subject only to standard sale terms.
The company is actively looking for a buyer and taking other steps to complete the sale.
The sale is probable and expected to close within twelve months.
The asset is being marketed at a price reasonable in relation to current fair value.
The plan is unlikely to be significantly modified or withdrawn.

Once classified as held for sale, the asset is carried at the lower of its carrying amount or fair value less cost to sell, and depreciation stops.⁶ If fair value less cost to sell later goes up, you can write the asset back up and recognize a gain. The write-up is capped at the cumulative impairment previously recorded, so the asset never rises above its pre-impairment carrying value.⁷

Tax Treatment

A book impairment is not a tax deduction. For federal tax purposes, the loss from writing an asset down generally isn’t deductible until the asset is actually sold, abandoned, or otherwise disposed of. Booking a $150,000 impairment does nothing to that year’s taxable income.

That creates a temporary difference between book income and taxable income. In the year of the write-down, book income falls but taxable income does not, so the company records a deferred tax asset for the future benefit it will get when the loss eventually becomes deductible on disposition. The deferred tax asset unwinds in the period the disposition occurs. If the company doesn’t expect enough future taxable income to use the benefit, a valuation allowance against the deferred tax asset may be required, which can further reduce the net financial statement benefit of the write-down.

1
Deloitte Accounting Research Tool. 2.5 Measurement of an Impairment Loss
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Deloitte Accounting Research Tool. 10.5 Fair Value Hierarchy
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Deloitte Accounting Research Tool. 2.9 Presentation of an Impairment Loss
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Deloitte Accounting Research Tool. Roadmap: Impairments and Disposals of Long-Lived Assets and Discontinued Operations – Section: 2.10 Disclosures Related to Recognition of an Impairment Loss
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Deloitte Accounting Research Tool. 3.3 Held-for-Sale Criteria
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Deloitte Accounting Research Tool. 3.5 Measuring the Carrying Value of a Disposal Group
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PwC Viewpoint. 5.3 Accounting for Long-Lived Assets to Be Disposed of by Sale