IMPAIRMENT TESTING: TO GROUP OR NOT TO GROUP
Aug 17, 2016 Vipul Mittal, CPA
FAR section of the CPA Exam generally tests the knowledge and skills on impairment testing. What is impairment? Often the carrying amount of noncurrent assets is more than the book value. We say that assets have impaired or gone down in value. In such a case, the entity should write down these assets and recognize an impairment loss.
One of the most important aspect of impairment testing requires an answer to the question, whether an entity tests individual assets or large groups of assets? The FASB answers this question by requiring that assets be grouped at an appropriate level with other assets and liabilities. This appropriate level is lowest level for which cash flows are independent of the cash flows of other assets and liabilities. So "independent cash flows" is the criteria that helps you identify the appropriate level. The entity should calculate impairment loss for the group and allocate impairment loss among the assets of the group on the basis of relative carrying amounts of those assets.
Determining the appropriate level for grouping the asset for impairment testing may be judgmental and challenging.
Let's understand this using an example. Seven Pepper Co., a leading exporter of exotic herbs, owns a factory building and machinery. The carrying amounts of these assets at the end of 2014, are: factory building $200,000 and machinery $100,000; and the remaining useful life is 8 years. Because of falling international demand for herbs and its falling profit, the company believes that its assets may be impaired. Now should the company perform the impairment test individually for both the assets or the carrying amounts of both building and machinery be combined and tested for impairment? If the cash flows from these two assets are not separable and independent of each other, the FASB requires that the company combines the factory and machinery as a group for impairment testing.