The recession officially began in December 2007, but some manufacturers didn’t start to feel the effects until late in 2008. Many manufacturers probably had fixed asset impairment discussions with their auditors at the end of 2008, but were able to conclude that sufficient evidence was not available to support an impairment. However, don’t be surprised if you have to consider a fixed asset impairment again at the end of 2009.
A company should consider a fixed asset impairment write-down when there is a change in circumstances or events for fixed assets. Those situations include, but are not limited to, the following:
- A significant decrease in the market price of fixed assets;
- A significant adverse change in the extent or manner in which a fixed asset is being used or in its physical condition;
- A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a fixed asset;
- A current expectation that, more likely than not, a fixed asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
Considering the difficulties many manufacturers had keeping fixed assets busy during 2009, there might be sufficient evidence to support an impairment write-down in 2009. In addition, any manufacturer that has investigated the possibility of selling idle fixed assets might have discovered that fair values have been driven down by the increased availability of used equipment.
As a general rule, fixed assets should not be carried at amounts in excess of recoverable value. The carrying amount of fixed assets is not recoverable if it exceeds the undiscounted sum of cash flows expected to result from the use and eventual disposition of the asset. If fixed assets are not recoverable, the impairment loss is measured by the excess of an assets carrying amount over its fair value. If an impairment loss is recognized, a new cost basis is established.
The best way to deal with a potential fixed asset impairment is to start a discussion with your auditors as early as possible.
Schneider Downs provides accounting, tax and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA, and Columbus, OH.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.