SFAS No. 144
Accounting for the
Impairment or Disposal of
Long-Lived Assets (“LLA’s”)
Jeffrey G. Olson, CPA
Babush, Neiman, Kornman & Johnson, LLP
www.bnkj.com
Outline

Introduction
 Assets to be held and used


Assets to be disposed of by sale



Impairment write-down
Valuation reserves (FV - cost to sell)
Presentation
Assets to be disposed other than by sale



Abandonment
Exchange
Distribution to owners (spin-out)
Overview
SFAS 144 Summary
Asset type
Accounting issues
Triggering event
New Cost Basis
1. Held and used
Impairment write down
Subjective (para 8 examples),
but result is quantitative
Yes
2. Disposal by sale
Valuation reserves/restoration
Continued/discontinued operations
Para 30 crititeria met
No-reserves can be restored
3. Disposal other than sale
Treated as "held and used"
until disposed
Still subect to impairment
test as "held and used"
Yes
FAS 144 Supersedes Other
GAAP Pronouncements

FAS 121


But retains its impairment
recognition and measurement
principals
APB 30 (disposal of a
segment of a business)


But retains its discontinued
operations presentation
requirements
Extends requirements to
dispositions “other than by sale”
Effective Date FYE After
12/15/01

Not applicable to






Goodwill and other nonamortizable intangibles
Financial services intangibles –
core deposits, servicing rights,
DAC
Equity investments
Deferred taxes
Unproved oil & gas properties
Various other industry specific
items
Group Concept

LLA may be part of or in a group with
other assets and liabilities



Group is lowest level for which there are
identifiable, independent cash flows - LLA itself
may not have discrete cash flows
Group becomes the measurement unit for FAS
144 (carrying values, cash flows, fair value)
Does not change GAAP for those other assets
and liabilities
• They are first measured under GAAP before applying
FAS 144 to the group (valuation reserves, LCM write
downs, etc.)
Group Concept Terminology

“Asset Group”


LLA’s to be held and used
“Disposal Group”

LLA’s to be disposed (by sale or
otherwise)
• In a single transaction
• Group includes liabilities to be
transferred
Outline

Introduction
 Assets to be held and used


Impairment write down
Assets to be disposed of by sale
 Assets to be disposed other than
by sale
LLA’s to be Held and Used

Impairment exists when


An asset’s (or a group’s) carrying value exceeds its
fair value
Recognized only if

Carrying value is not recoverable from the sum of the
future undiscounted cash flows to be derived from the
asset (or group) from both
• Operations
• Future disposition

When to test? (paragraph 8 of handout)
Example 1 in Appendix A Handout

Measurement at group level
 Allocation of impairment loss



Only to LLA’s on pro-rata basis
Can limit allocation to FV of one or
more LLA’s if FV higher than the
resulting CV under pro-rata
allocation of impairment loss
Establishes new cost basis


Write-downs are not restored if value
subsequently increases or if CV
becomes recoverable
Lowers future depreciation charges
Future Cash Flows

Directly related


Exclude interest


Un-leveraged asset cash flows
Entities own assumptions


Arise from use and sale of assets
(or group)
Considering all available
information
Can use probability weighted
CF’s
Future Cash Flows Continued

Remaining useful life


Based on existing service potential



Of asset or of primary asset in group
Cash flows for necessary maintenance
included
Cash flows that are for improving service
potential are excluded
Assets in development


Service potential when complete
Include interest to be capitalized as a cash flow
Goodwill Inclusion

Generally not applicable to real
estate - no goodwill
 Carrying value of goodwill
assets


Used in impairment test only when
asset group is or includes a reporting
unit (as defined in FAS 142)
Lower level group with only part
of a reporting unit

Will exclude goodwill carrying value in
impairment test
Reporting & Disclosure

Loss is part of continuing
operations


Included in “income from operations”
subtotal
In the FS Notes

Description of assets and impairment
 Amount of loss, if not on face of the FS
 Fair value method used - market
quote/DCF/appraisal/etc...
 If FAS 131 (business segment), then
identify segment to which loss pertains
Outline

Introduction
 Assets to be held and used
 Assets to be disposed of by sale



Valuation reserves (FV- cost to sell)
Presentation
Assets to be disposed other than by sale
Recognition

Identified as held for sale (in FS or notes)
during period in which first meet para 30
criteria - Handout

General one year sale requirement, some exceptions
 Others

Failure to continue to meet criteria


Reclassify as “held and used”
Newly acquired LLA


Held for sale if one year criteria met at acquisition and
Others criteria are likely to be met “within a short
period”
Measurement

Lower of



Not a new cost basis


Cost, or
Fair value less cost to sell
Subsequent increases in value, net of
disposal costs, can be booked up to
previous losses recorded
Other


No depreciation while held for sale
Future operating losses are recorded
as incurred, not part of valuation write
down
Presentation

If a “component” of an entity

Then report current and prior periods
as discontinued operations, net of
income taxes if both:
• Related cash flows and operations will be
eliminated as a result of the sale, and
• No significant continuing involvement after
the sale

If not a “component”


Then continue to report as continuing
operations
Related assets and liabilities

Separately identified on the balance
sheet
Presentation - What is a
Component

Component – operations
and CFs clearly
distinguished




Reporting or operating segment
Reporting unit
Subsidiary
Asset group
Disclosure in FS Notes

Description of assets &
circumstances leading to
expected disposal
 Gain or loss recognized, if
not on face of the FS
 Revenue & pre-tax profit
(loss) in discontinued
operation, if applicable
 FAS 131 segment
information, if applicable
Change In Sale Plan

Measurement – subsequent decision not
to sell after “Held for Sale” treatment has
been applied, then

Reclassify on BS as held and used
• Measure at the lower of
– original cost less all depreciation that would have been
allowed, or
– Fair value on the date subsequently determined not for
sale
• Any gain or loss is part of continuing operations

Prior operations, previously presented as
discontinued operations will, be reclassified as
continuing
Outline

Introduction
 Assets to be held and used
 Assets to be disposed of by sale
 Assets to be disposed other than by sale
Other Than Sale Disposals

Abandonment, exchange,
or distribution to owners
(spin-out)

Continue to be classified and
accounted for as “held and
used” until disposed, subject
to impairment testing
Abandonment

Disposed


If committed to a “plan” of
disposal


When it is no longer being used
Shorten useful life for depreciation
Temporarily idle is not
abandoned
Exchanged or Distributed

Disposed


If tested for “held and used”
impairment



When exchange or disposition takes place
Then use cash flows for remaining useful
life to test for recoverability
Ignore anticipated disposition
If a “component,” then presented as
discontinued operations (current &
prior periods) at disposal date
Withholding Requirements for
Foreign Partners in US Real
Property Partnerships
William S. Johnson, CPA
Hunter M. Showalter
Babush, Neiman, Kornman & Johnson, LLP
www.bnkj.com
Summary of Code Section

Section 1441-withholding on
nonresident aliens-flat tax
 Section 1442-withholding on
foreign corporations-flat tax
 Section 1443-withholding on
foreign tax-exempt
organizations
 Section 1444-Withholding on
Virgin Island income
Summary of Code Section

Section 1445 - withholding
on dispositions of US real
property interests
(FIRPTA)-Form 8288
 Section 1446- withholding
on foreign partners in US
partnerships - Forms
8804, 8805 and 8813
Taxation of Transfers of US
Real Property Interests

Foreign Investment in US Real
Property Tax Act of 1980 (FIRPTA)
 FIRPTA treats gains and losses
from dispositions of US real
property interests as effectively
connected with the conduct of a
US trade or business
 Purchaser of US real property
interest is generally required to
withhold 10% of the purchase
price
Taxation of Transfers of US
Real Property Interests

Tax due in 20 days of
transfer
 Exceptions to
withholding
requirements


Non foreign affidavit
FIRPTA withholding
certificate -If filed by day of
transfer, tax must be
withheld but does not need
to be paid to IRS until 20
days after IRS determination
Taxation of Repatriated
Earnings

Interest & dividends paid by US
corporations to foreign
shareholders are generally
subject to a 30% withholding tax.
The withholding rate may be
lowered due to tax treaty.
 Foreign corporations that are
engaged in business in the US
are subject to a 30% branch
profits tax on earnings not
reinvested in active US business
assets. Treaties may lower the
rate or even eliminate the tax.
Taxation of Operating
Income

US source income that is not
effectively connected with the
conduct of a US trade or
business



30% withholding tax on gross US
source income
No deductions
No treaty reduction in rate
Taxation of Operating
Income

US source income that is
effectively connected
with the conduct of a US
trade or business


Taxation at regular rates on
net income after deductions
Must file US tax returns
Federal Foreign Tax
Withholding

Options for Calculation

Safe Harbor Option
 Standard Option
 Option 1
 Option 2
Federal Foreign Tax
Withholding

Safe Harbor


4 Installments Due 4/15, 6/15, 9/15, 12/15
Each quarterly installment is 25% of prior year’s
total withholding due on effectively connected
income (ECI) provided that
•
•
•
•
Prior year was 12 months
Partnership filed prior year tax return
Prior year ECI was not less than 50% of current year ECI
Current year ECI can’t be twice that of prior year ECI
Federal Foreign Tax
Withholding

Standard option
 4 Installments Due 4/15, 6/15,
9/15, 12/15



1st and 2nd installments based on
annualized ECI using first 3 months of
current year
3rd installment based on annualized
ECI using first 6 months of current year
4th installment based on annualized
ECI using first 9 months of current year
Federal Foreign Tax
Withholding

Option 1 & 2



Must elect to use either option
each year by filing Form 8842
Election must be made by 4/15 for
calendar year partnerships
Options have different
annualization periods than
standard option
Federal Foreign Tax
Withholding

Example - Standard Option
 Assumptions

ECI for first 3 months is $106,000
 ECI for first 6 months is $203,000
 ECI for first 9 months is $290,000
 Foreign partner’s income is 60%
of partnership income
1
Annualization periods (see instructions)
1
2
Enter the partnership’s effectively connected taxable income
for
each period
2
3
Annualization amounts (see instructions)
3
4
Annualized effectively connected taxable income. Multiply
line 2 by line 3
4
424,000.00
424,000.00
406,000.00
386,665.70
5
Foreign partner’s annualized effectively connected taxable
income. Enter the foreign partner’s share of line 4(60%)
5
254,400.00
254,400.00
243,600.00
231,999.42
6
Multiply line 5 by 35% Sec.1446
6
89,040.00
89,040.00
85,260.00
81,199.80
7
Section 6655(e)(2) applicable percentage
7
0.25
0.50
8
Multiply line 6 by line 7
8
22,260.00
44,520.00
63,945.00
81,199.80
9
Add the amounts in all preceding columns of line 10
9
(22,260.00)
(44,520.00)
(63,645.00)
22,260.00
19,425.00
17,254.80
10
Installment payments of section 1446 tax due for foreign
partner.Subtract line 9 from line 8. If less than zero, enter -0-
10
First 3 Months
106,000.00
4.00
22,260.00
First 3 Months
First 6 Months
106,000.00
203,000.00
4.00
2.00
0.75
First 9 Months
290,000.00
1.33
1.00
Federal Penalties

Late payment of tax when tax is due - 1/2 of
1% for each month or part of a month the tax
is unpaid
 Failure to withhold under section 1446 may
be subject to civil penalty equal to amount
that should have been withheld
 Failure to file 8804 w/IRS & furnish 8805 to
correct recipient can carry maximum penalty
of $250,000 AND $100,000 respectively
Georgia Foreign Withholding





Withholding is 4% of distribution made to
non-Georgia resident (foreign partner), not
based on income
Georgia is unclear on whether withholding is
required for distributions made on income or
distributions made on return of capital
File Form GA-V on 15th day after each month
a distribution is made
File Form G-7 each quarter after
distribution(s) are made
File Form G-2A annually to foreign partners