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In March 1995, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 121, entitled "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires entities to consider whether noncurrent assets have been impaired and provides guidance in measuring impairment losses for both noncurrent assets held for sale and noncurrent assets held for use.
SFAS No. 121 is applicable to determining impairment in all noncurrent assets in GAAP-based financial statements (including assets held by not-for-profit entities) except that the document is not applicable to the following:
( 1 ) Financial instruments
(2) Mortgage servicing rights and certain other intangibles of financial institutions
(3) Deferred taxes
(4) Discontinued operations
(5) Certain assets associated with "special" industries.
The purpose of this paper is to provide practical guidance to practitioners in considering (a) whether noncurrent assets have been impaired, (b) how to measure the impairment loss, and (c) how to display the impairment loss in GAAP-based financial statements.
(Practitioner Note: Since SFAS No. 121 is a measurement document, not a disclosure document only, the provisions of this Statement are not applicable to financial statements prepared on an other comprehensive basis of accounting, e.g., tax basis and cash basis financial statements.)
Assets Held for Sale
Assets that are categorized as "held for sale" should be accounted for as if they were inventory-i.e., they should be accounted for at lower than cost or market. As used in SFAS No. 121, market is considered to be the fair value of the asset less any costs directly associated with the disposition of the asset. If the fair value of the asset (less any disposition costs) exceeds the book value of the asset, no impairment loss recognition is necessary; if the fair value of the asset (less any disposition costs) is less than the book value of the asset, an impairment loss should be recognized in income from continuing operations and the asset should be written down to its fair value.
(Practitioner Note: Impairment losses recognized in this category are considered to be "temporary." As such, if in a subsequent period, the fair value of the asset recovers, the asset may be written up, but never to an amount that exceeds the book...