What is the FAR difference between impairment for a held-for-use asset and a held-for-sale asset?

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AcadiFi · Accepted Answer

Held-for-use long-lived assets follow a two-step style approach under GAAP. First test recoverability by comparing carrying amount with undiscounted future cash flows. If carrying amount is not recoverable, measure the impairment as carrying amount minus fair value. Held-for-sale assets skip the recoverability screen and are written down directly to fair value less cost to sell. Depreciation also stops once an asset is classified as held for sale.

Example: Oak Terrace Distribution has equipment with a carrying amount of $410,000. Expected undiscounted future cash flows are $360,000 and fair value is $300,000. Because $410,000 exceeds $360,000, the asset is not recoverable, so Oak Terrace records an impairment loss of $110,000. Now assume instead management commits to sell the equipment immediately, fair value is $315,000, and selling costs are $10,000. The held-for-sale carrying amount becomes $305,000, so the impairment loss is $105,000.

The exam shortcut is this: held for use asks, can the asset recover its carrying amount through use and eventual disposal? Held for sale asks, what net amount will the company actually collect from selling it now? Keep the undiscounted cash flow test only for held-for-use assets. Also remember that later gains for held-for-sale assets are limited and cannot push the carrying amount above the pre-impairment amount. Practice more in our CPA FAR question bank.

What is the FAR difference between impairment for a held-for-use asset and a held-for-sale asset?

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