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FASB’s Tentative SFAS 121
Amendments
The Board has revisited SFAS 121
and made some significant
changes.
T
he Financial Accounting Standards
Board (FASB) issued Statement No.
121, “Accounting for the Impairment
of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of,” in 1995. This
statement requires that companies holding and using long-lived assets and certain
identifiable intangibles review them for
impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. The purpose is to estimate the
future cash flows expected to result from
the asset’s use and its eventual disposition. If the sum of the expected future
cash flows (undiscounted and without
interest charges) is less than the carrying
amount of the asset, an impairment loss
should be recognized.
The statement also requires an entity to
report those assets and intangibles at the
lower of the carrying amount or the fair
value less cost to sell. However, assets covered by APB Opinion No. 30, “Reporting
the Results of Operations—Reporting the
Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and
Infrequently Occurring Events and
Transactions,” will continue to be reported at the lower of carrying amount or net
realizable value.
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After Statement 121 came out, there
arose implementation issues surrounding
its provisions for assets to be disposed of
and questions about the effect of those
provisions on other accounting literature.
Since then, the Board has reached several
tentative conclusions to amend and clarify
the provisions of Statement 121.
The statement requires a
company performing the review
for recoverability to estimate the
future cash flows expected to
Scope
The scope of Statement 121 would
include goodwill associated with assets to
be disposed of and costs associated with a
plan to dispose of an asset or to exit a
business activity, including certain
employee termination benefits.
Assets to Be Held and Used
■ When to Test an Asset for
Recoverability— An asset retaining more
than half its previously estimated useful
life at its expected disposal date must be
tested for recoverability if the company
expects to dispose of it by any means.
That situation would be added to the list
of events or changes in circumstances
identified in Statement 121 that indicate
that the carrying amount of an asset may
not be recoverable.
■ Estimates of Future Cash Flows Used
to Test an Asset for Recoverability —
would be made over the remaining useful
life of the asset or (for assets are tested as
a group) that of the tangible primary com-
Equipment Leasing Today November/December 1999
result from the asset’s use and
its eventual disposition.
ponent asset of the group (primary asset).
Those estimates are based on how the
entity expects to use the asset given its
existing service potential at the test date.
Therefore, the estimates would include
only cash flows associated with future
expenditures necessary to maintain the
existing service potential of an asset over
its remaining useful life, including repairs
and maintenance. This also goes for
replacements of component assets of an
asset group (other than the primary asset
of the group) with the same service potential. If the assets of an operating unit are
tested as a group, those estimates would
exclude future cash inflows and outflows
associated with other recognized assets
and liabilities of the group.
For an asset under development, estimates of future cash flows would be based
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An asset must be tested for recoverability if a
company expects it to be disposed of and, at the
disposal date, more than half of its useful life
remains.
on how an entity expects to use the asset given its expected service potential when development is substantially complete and it
is ready for its intended use. Therefore, those estimates would
include all future expenditures necessary to complete development of the asset, including future interest payments that will be
capitalized as part of the cost of the asset.
■ Assets Tested for Recoverability as a Group —require that an
impairment loss be measured as the amount by which the aggregate carrying amount of the group exceeds its fair value. An
impairment loss, if any, would be allocated first to the carrying
amount of the goodwill, if any, and then to the other assets of the
group on a pro rata basis using the relative carrying amounts of
those assets. The carrying amount of an individual asset of the
group, however, would not be reduced below its observable market price, when available.
an impairment loss would be recognized if the carrying amount
of an asset exceeds its fair value less cost to abandon (only the
incremental direct costs necessary to abandon the asset). If
those costs exceed the fair value of the asset, the excess amount
would be recognized as a liability when incurred. The asset
would not be written down to a fair value less than zero. The
provisions for assets to be disposed of by sale would not apply.
Assets to Be Disposed Of By Sale
■ Recognition —An asset or assets to be sold as a group would
be classified as held for sale (and depreciation would cease)
when management commits to a plan to sell the asset(s) that
meets all of the following criteria:
• The asset is available for immediate sale on normal
delivery terms.
• An active program to locate a buyer and other actions
required to complete the plan have been initiated.
• The sale of the asset is probable and its transfer is expected
to qualify for recognition as a completed sale under generally
accepted accounting principles within one year. (That criteri on would not be met if, for example, an asset has been sold
pursuant to a sales agreement that is in substance an option to
Assets to Be Exchanged for Similar Productive Assets or
Distributed in a Spin-o f f
■ Fair Value Estimates —If an entity’s estimates of future cash
flows are used to estimate fair value, those estimates would be
adjusted to incorporate assumptions that marketplace participants would use in their estimates of fair value. For example, an
entity’s estimates of future cash flows would be adjusted if the
entity is not using the asset at its highest and best use and if
available information indicates that marketplace participants
would use the asset at its highest and best use. Those estimates
also would be adjusted if available information indicates that
market participants would use different assumptions that would
affect the estimates of future cash flows expected to result from
the use of the asset.
An asset to be exchanged for a similar productive asset or distributed to owners in a spin-off would be classified as held and
used until the date on which the asset is exchanged or distributed. At that date, an impairment loss would be recognized if the
carrying amount of the asset exceeds its fair value. The provisions for assets to be disposed of by sale would not apply.
■ Assets to Be Abandoned—would be classified as held and used
until they are no longer being used in operations. At that date,
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purchase the asset, or if its transfer will
be accounted for as a sale and leaseback transaction.)
• An estimate has been made of the
proceeds expected to result from the
FASB Proposes to Eliminate Pooling of Interest Accounting
On September 7, 1999, FASB issued an Exposure Draft (ED), “Business
Combinations and Intangible Assets.” The ED would eliminate the “pooling of
interests” method of accounting and would require its replacement with the
“purchase” method for all business combinations, since FASB has concluded
that all business combinations are acquisitions. The proposal limits the maximum period over which goodwill may be amortized to 20 years. The ED, however, does allow for the amortization of identifiable intangible assets for
periods longer than 20 years if the economic useful life can be supported as
being longer than that, even, in some cases, with no amortization required.
Under current rules, accountants can choose between the two methods as
long as certain criteria are met. The purchase method requires that one company be identified as the buyer, which records the company being purchased
at the price it actually pays. The excess of the purchase price over the fair
value of the assets is recorded as goodwill. Goodwill is charged to earnings
over time. Under the pooling of interests method, the two companies simply
add together the book values of their net assets.
Goodwill would be recognized as an asset and amortized to the income
statement on a straight-line basis. The amortization of goodwill would be presented net of impairment losses and net of taxes, and the maximum period
for amortization would be shortened from 40 to 20 years.
Identifiable intangible assets would be separately identified as assets.
Although the ED establishes a presumption that the useful economic life of
an identifiable intangible is no more than 20 years, it allows for intangibles
to be amortized over longer periods or maybe not at all, if a longer or indefinite useful economic life can be supported.
The adoption of the single purchase accounting method would put US
GAAP in closer harmony with most international standards. Most accountants believe that this change would enable investors to more fairly compare
financial statements and obtain more relevant information on the value of a
combined business.
FASB has requested written comments by December 7, 1999. The proposed
Statement would be applied to business combinations initiated after the
effective date of the final Statement and is expected to be issued by the end
of the year 2000.
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sale of the asset that is reasonable in
relation to the asset’s current fair value.
• It is unlikely that significant changes
to the plan will be made or that the
plan will be withdrawn.
• Assets held for sale as a group are
expected to be sold to a single buyer.
• The estimate of the proceeds expected to result from that sale is higher
than if the assets were sold individually.
If circumstances beyond a company’s
control extend the time required to sell an
asset beyond one year (the third criterion), as soon as possible the firm must initiate actions responding to those
circumstances, for the asset would be
classified as held for sale. The same is
true of an asset acquired through foreclosure or in a business combination that will
be sold, but the plan of sale criteria are
not met at the acquisition date.
If the plan of sale criteria are met after
the balance sheet date but before
issuance of the financial statements, the
asset continues to be classified as held
and used in those financial statements. A
description of the assets and related liabilities to be sold is disclosed in the notes
to the financial statements.
If, in the circumstances above, the asset
is tested for recoverability as of the balance sheet date, the estimates of future
cash flows used in that test are based on
assessments of conditions that could have
been ascertained from information that
existed at that date. Those conditions
include the assessment at the balance
sheet date of the likelihood of the asset’s
sale. That assessment, made in good faith,
would not be revised solely because of
the entity’s subsequent commitment to a
plan to sell the asset or other conditions
that arise subsequent to the balance
sheet date.
For example, assume that after the
balance sheet date but before issuance of
the financial statements an entity receives
notification that its major customer has
entered an exclusive contract with a com-
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petitor, significantly reducing future
cash flows expected from the use of the
asset. In response, the entity commits to
a plan to sell the asset. Further, at the
balance sheet date, the entity had been
negotiating a new contract with the customer, but had considered it only a remote
likelihood that the customer would
change suppliers.
In testing the asset for recoverability,
the loss of the customer is a condition
that existed at the balance sheet date if
the customer had entered into the contract with the competitor prior to that
date. Accordingly, the estimates of future
cash flows would be based on the loss of
the customer and its effect on the likelihood of the asset’s sale at that date. If
those requirements aren’t met, it is not a
condition that existed at the balance
sheet date, and the estimates of future
cash flows would be based on the customer relationship and the likelihood of
sale that existed at that date.
■ Assets Held for Sale as a Group —
would be measured at the lower of the
aggregate carrying amount, fair value less
cost to sell the group, or the net of liabilities directly associated with the assets
that a potential buyer would be (a)
required to assume or (b) willing
to assume because they would increase
the asset group’s value. Assets and related
liabilities held for sale as a group would
not be permitted to
be offset in the statement of
financial position.
■ Changes to the Plan of Sale —such as
deciding not to sell at all, require reclassifying the asset as held and used. It must
be measured at the lower of its:
• Carrying amount on a held-and-used
basis at the date of the initial decision
to sell the asset, adjusted for the depreciation expense that would have been
recognized had the asset been continuously classified as held and used, or
• Fair value at the date of the decision
not to sell the asset.
Any required adjustment would be recognized in the period of the subsequent
decision not to sell the asset.
If an entity decides to sell an individual
asset classified as held for sale as part of a
group, the remaining assets of the group
would not continue to be grouped. If those
remaining assets will be held for sale, they
must be measured individually at the
lower of their carrying amounts or fair
values less cost to sell.
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If the plan of sale changes, a description of the facts and circumstances
leading to the change and its effect on
the results of operations for the period
must be disclosed in the notes to the
financial statements.
■ Goodwill —If all of the assets previously acquired in a business combination
accounted for using the purchase method
are to be disposed of, the goodwill, if any,
that arose in that transaction would be
included as part of the asset group. If only
some of those assets are to be disposed of,
the goodwill associated with them would
be included as part of the asset group.
Absent a reasonable basis on which to
allocate the goodwill to those assets, it is
allocated on a pro rata basis using the relative fair values of the long-lived assets
and identifiable intangibles acquired at
the acquisition date.
business activity that would be covered
by a proposed statement include:
• Employee termination benefits provided to employees involuntarily terminated pursuant to a one-time benefit
arrangement not constituting a preexisting or ongoing employee benefit plan.
• Costs to be incurred under operating
lease agreements and other contractual
obligations that existed prior to
the plan.
• Other associated costs (eg. those to
maintain and operate the related asset,
activity, or personnel). The requirements for liability recognition apply
even if those costs (a) are incremental
to the other costs incurred by the entity
prior to the plan, (b) will be incurred as
a direct result of the plan, and (c) will
not generate revenues and will result in
operating losses.
Recognition of Liabilities for Costs
Associated with a Plan to Dispose of an
Asset or to Exit a Business Activity
These liabilities would be recognized in
the period(s) in which they are incurred;
that is, when an entity has a present obligation that meets the definition of a liability in the FASB Concepts Statements and
the amount is reasonably estimable. A
present obligation exists when an event
occurs that leaves an entity little or no
discretion to avoid a future sacrifice of
assets. While a plan may evidence an entity’s commitment to sacrifice assets in the
future, the entity’s commitment is to
itself, not to others. Therefore, an entity’s
commitment to a plan would not in itself
constitute the requisite past event for
those costs. The results of operations following an entity’s commitment to a plan
for an asset to be disposed of or for a
business activity to be discontinued would
be recognized in the period(s) in which
they occur.
The types of costs associated with a
plan to dispose of an asset or to exit a
Amendment to APB Opinion No. 30
Opinion 30 would be amended to replace
the term “segment of a business” in referring to operations defined in its paragraph
13 with a term such as “significant component of a business.” Opinion 30 would also
be amended to replace the recognition
and measurement provisions eliminating
the results of operations of a significant
component of a business from future
income statements. Accordingly, a significant component of a business would be
subject to the same recognition and measurement provisions as other assets to
be sold.
As amended, Opinion 30 retains the
income statement display provisions. But
it requires an entity to display the results
of operations (including revisions to estimates of fair value less cost to sell) following its commitment to a plan of sale in
discontinued operations in the period(s)
in which they occur, rather than at the
plan date.
A discontinued operations display
would include the period in which a sig-
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nificant component of a business is disposed of and, for certain types of adjustments, in periods following that disposal.
Those adjustments include:
• Revisions to amounts previously
reported as part of the disposal
transaction
• Contingencies that arise pursuant to
the terms of the disposal transaction
• Contingencies that arise from and
that are directly related to the
operations of the component prior
to its disposal
• Gains and losses associated with the
settlement of employee benefit plan
obligations (pension, OPEB, and other),
provided that the settlement is directly
related to that disposal. A settlement is
directly related to the disposal if there
is a demonstrated direct cause-andeffect relationship and it occurs within
one year of the disposal, unless the settlement is delayed by events or circumstances beyond an entity’s control.
The Board intends to discuss remaining
issues relating primarily to the impact of
Statement 121 on EITF Issue No. 87-11,
“Allocation of Purchase Price to Assets
to Be Sold,” in its October and November
meetings, and is expected to release
an Exposure Draft in the first quarter
of 2000. L
ELT thanks David L. Cornish, Arthur
Andersen LLP, New York, for this month’s
column.