To calculate an impairment loss on a long-lived asset under U.S. GAAP, you run a two-step process from ASC 360: first test recoverability by comparing the asset group’s carrying amount to the total undiscounted future cash flows it is expected to generate, and if those cash flows fall short, measure the loss as carrying amount minus fair value. The recoverability test is a pass/fail screen. The measurement step is where the actual number comes from. Everything else in the calculation, from how you define the asset group to how you pick a valuation method, exists to make those two comparisons meaningful.
When You Have to Run the Calculation
You don’t test long-lived assets for impairment on a schedule. Testing is required only when specific events or changes in circumstances suggest the carrying amount may not be recoverable. ASC 360-10-35-21 lists triggering events, and one is enough:
- A significant decrease in the market price of the asset or asset group.
- A major change in how the asset is used, or significant physical damage.
- An adverse regulatory action, loss of a key contract, or shift in the competitive environment affecting the asset’s value.
- Acquisition or construction costs running well beyond what was originally expected.
- A current-period cash flow loss combined with a history of losses tied to the asset, or forecasts of continued losses.
- A current expectation, more likely than not (above 50 percent), that the asset will be sold or disposed of significantly before the end of its useful life.
Other warning signs can trigger testing too, including a significant decline in the company’s stock price or an impairment of goodwill or indefinite-lived intangibles tied to the same asset group. The list isn’t exhaustive. Management has to exercise judgment and can’t ignore warning signs simply because they don’t appear on a checklist.
Grouping the Asset Before You Calculate
Most long-lived assets don’t produce cash flows on their own. A delivery truck means nothing without the warehouse it serves and the routes it runs. ASC 360 requires you to test impairment at the asset group level, defined as the lowest level at which identifiable cash flows are largely independent of the cash flows of other asset groups. In practice, start with the smallest operational unit that tracks its own financial results and ask whether its cash flows stand on their own.
Getting the grouping wrong changes every number that follows. Define the group too broadly and profitable assets can mask an impaired one. Too narrowly, and you may be testing assets that have no independent cash flows at all. The grouping should reflect how management actually monitors and operates the business.
Step 1: The Recoverability Test
Once a triggering event is identified, the first formal step is the recoverability test. This is a screen, not a measurement of the loss. Estimate the total undiscounted future cash flows the asset group is expected to generate over its remaining useful life, including any proceeds from eventual disposal.1Deloitte Accounting Research Tool (DART). 2.5 Measurement of an Impairment Loss
The word “undiscounted” is doing heavy lifting. You are not adjusting these cash flows for the time value of money. A dollar expected ten years from now counts the same as a dollar expected next month. The test is deliberately generous. It is designed to filter out assets that clearly have no problem, not to produce a precise valuation.
Compare the total undiscounted cash flows to the asset group’s carrying amount:
- If cash flows equal or exceed carrying amount, the asset passes. No impairment is recorded and the process stops.
- If cash flows fall short, the asset fails and you move to fair value measurement.
This is where companies get tripped up. Passing the recoverability test doesn’t mean the asset is worth its book value. It just means the shortfall isn’t severe enough to require a write-down under ASC 360’s two-step framework.
Step 2: Measuring Fair Value
When an asset group fails the recoverability test, you determine its fair value under ASC 820. Fair value is the price you would receive to sell the asset in an orderly transaction between market participants. Three valuation approaches are available, and their inputs sit in a hierarchy based on reliability.2Deloitte Accounting Research Tool. 10.5 Fair Value Hierarchy
The Fair Value Hierarchy
- Level 1 inputs are quoted, unadjusted prices in active markets for identical assets. If a Level 1 price is available, you generally cannot substitute lower-level inputs. These are the gold standard but are rarely available for specialized long-lived assets.
- Level 2 inputs are observable inputs other than Level 1 prices, such as quoted prices for similar assets, interest rates, or yield curves. Adjustments to Level 2 data are common.
- Level 3 inputs are unobservable, based on the entity’s own assumptions about what market participants would use. These require the most documentation and draw the most audit attention.
If a measurement relies on inputs from different levels, the entire measurement falls into the lowest level that is significant to the overall calculation.2Deloitte Accounting Research Tool. 10.5 Fair Value Hierarchy
Valuation Approaches
The market approach uses prices from actual transactions involving identical or comparable assets. When a liquid market exists, this is straightforward. The income approach discounts expected future cash flows to present value using a rate that reflects the risk of those cash flows, often derived from the entity’s weighted average cost of capital and adjusted for asset-specific risk. The cost approach estimates what it would cost to replace the asset’s service capacity, less depreciation. For specialized equipment where market comparisons are scarce, the cost approach is often the most practical option.
The choice depends on what data is available, and entities frequently use more than one approach to cross-check results.
Step 3: The Loss Formula and the Journal Entry
The impairment loss itself is the simplest part of the math:
Impairment loss = Carrying amount − Fair value
If equipment has a carrying amount of $1,000,000 and a fair value of $650,000, the impairment loss is $350,000.1Deloitte Accounting Research Tool (DART). 2.5 Measurement of an Impairment Loss
The journal entry debits an impairment loss expense account and credits either accumulated depreciation or the asset account directly, reducing book value to the newly determined fair value. On the income statement, ASC 360-10-45-4 requires the loss to appear within income from continuing operations before income taxes. If the company presents a subtotal like “income from operations,” the impairment loss belongs there.3Deloitte Accounting Research Tool. 2.9 Presentation of an Impairment Loss The new, reduced carrying amount becomes the asset’s accounting basis going forward.
Recalculating Depreciation After the Write-Down
After the loss is recorded, depreciate the reduced carrying amount over the asset’s remaining useful life. Every future period changes. Take that same $1,000,000 asset with five years of useful life remaining. Before impairment, annual straight-line depreciation was $200,000. After the $350,000 write-down, the new $650,000 carrying amount spread over five years drops annual depreciation to $130,000. The remaining useful life itself may also need reassessment. An impairment event sometimes signals that the asset won’t last as long as originally expected.
The Loss Is Permanent
Under U.S. GAAP, a recorded impairment loss on a long-lived asset cannot be reversed, even if market value later recovers.4RSM US LLP. US GAAP vs. IFRS Impairment of Long Lived Assets The book value stays at the written-down amount. That makes the fair value measurement worth doing carefully the first time. There is no mechanism to correct an overly aggressive write-down later.
Goodwill and Indefinite-Lived Intangibles Follow Different Math
If the asset in question is goodwill or an indefinite-lived intangible, the calculation above doesn’t apply. ASC 350 governs those assets, and there is no undiscounted recoverability test.
For goodwill, testing may start with an optional qualitative assessment sometimes called “Step 0,” in which management evaluates whether it is more likely than not that a reporting unit’s fair value has dropped below its carrying amount.5FASB. Goodwill Impairment Testing If concerns exist or management skips the qualitative step, the quantitative test compares the reporting unit’s fair value to its carrying amount, including goodwill. When carrying amount exceeds fair value, the impairment loss equals that excess, capped at the total goodwill allocated to the reporting unit. If a reporting unit’s carrying amount exceeds fair value by $10 million but only $8 million of goodwill is assigned to it, the recognized loss is $8 million.6DART – Deloitte Accounting Research Tool. 2.4 Quantitative Assessment (Step 1)
Indefinite-lived intangible assets like trademarks and certain licenses skip the recoverability test entirely. The quantitative test compares fair value directly to carrying amount, and any excess of carrying amount over fair value is the loss.7Deloitte Accounting Research Tool. 4.4 Intangible Assets Not Subject to Amortization Because these assets aren’t amortized, they must be tested at least annually rather than only when triggering events arise.
The Calculation Doesn’t Create a Tax Deduction
Recording an impairment loss on the books does not produce a tax deduction. Federal income tax depreciation under IRC Section 168 follows its own recovery periods, methods, and conventions that are independent of GAAP treatment.8Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System Writing down an asset for book purposes doesn’t change its tax basis or accelerate any tax deduction.
This disconnect creates a temporary book-tax difference. Book basis drops immediately, tax basis stays higher, and the gap produces a deferred tax asset because future tax deductions will exceed future book depreciation expense until the two bases converge. A tax loss generally requires something more concrete than a book write-down: an actual sale, exchange, abandonment, or casualty event under IRC Section 165. Abandonment, for example, requires that you voluntarily and permanently give up possession and use of the property with no intent to transfer it to anyone else.9Internal Revenue Service. Publication 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Determining that an asset is worth less than book value doesn’t clear that bar.