Impairment of long-lived assets 2552

  • How does your company test the control surrounding impairment of long-lived assets? Since any potential impairment (and related required analysis) is event-triggered, there is not really a regular control activity that monitors it. All analyses are done if there are events that would indicate impairment. Any insight will be appreciated.

  • Hi,
    Controls in connection with the impairment of long-lived assets may be tested by using analytical review procedures and applying auditor judgment. This seems practical from a testing standpoint because the transactions are considered to be non-recurring or unusual transactions and are not readily tested using a standard APG.
    If the Company has an event that gives rise to an asset impairment entry, you can examine the documentation that was used to support the journal entry that was recorded to the FS.
    The relevant assertion for consideration is valuation/allocation this is not generally evaluated using substantive testing. Rather, you should examine the support documentation for reasonableness and assess if the impairment entry was properly reviewed, approved, and the amount recorded to the FS is consistent with the supporting documentation.
    An impairment event might not necessarily require a journal entry, but require disclosure in the FS. For example, this may occur if management makes a decision with regard to an asset disposal or decide to maintain it for continued use. In this case, a decision to dispose of a long-lived asset in the future might require disclosure in the FS, but not necessitate recording an amount immediately to the FS.
    SOX tests that are performed to determine if proper disclosures are made are often useful when testing an asset impairment for disclosure purposes. In this case, you might examine the FS Disclosures Checklist to see that the individual(s) responsible for disclosure reporting has considered any asset impairment(s).
    The auditor will refer to FAS-144 and other guidance to determine if asset impairments were properly reported and/or disclosed for GAAP purposes. Accordingly, their workpapers might lean towards documenting their assessment of the Company’s annual impairment testing, but not include workpapers prepared from performing substantive testing.
    Hope this helps,

  • although milan has mentioned, it is important that approriate controls are in place to ensure that trigger events that might require an impairment review are identified and appropriate action taken. We incorporate this review into our quarter-end processes.

  • Hi. It’s been a while since I asked the original quetsion, but I have some follow-up clarifications.
    We do have quarterly checklists where local management signs off, and those checklists include an item that asks them to consider if there were any triggering events that may indicate a potential impairment issue. If there are no triggering events, no further analysis is required per FAS 144. However, our auditors do not seem to be satisfied by this control activity. At the same time, I am not sure what else we can do as proof that we have done ‘step 1’ of FAS 144, short of performing ‘step 2’ (the actual comparison of cash flow and assets) regardless.
    How do you document step 1 of the process (the consideration/identification of triggering events)? Thank you for any input.

  • In our retail business, the value of our retail locations is directly related to their profitability as they are somewhat specialized. We review these on a semi-annual basis, using rolling 2 year operating profit for our indicator test. It is very easy to determine whether or not we have performed this step as we have analytical workpapers to support the reviews.
    I would suggest asking your auditors what they consider proper documentation to support your regular step one reviews. Also ask them what companies with a similar business background do (their audit firm must have similar clients).
    Since they no longer provide an opinion on your testing methods, you are free to do what you wish for testing. However, if they are spending a significant amount of time getting comfortable with your testing in order to support their WP files and are billing you for this time, then there might be some incentive for you to change how you test / document testing in order to reduce fees.

  • Hi KYMike,
    Thank you for the information. So you are doing the Step 2 analysis for the purpose of documenting the FAS 144-related review? Or is it something that you do to analyze the business anyway? I am considering going this route, or at least making up a simplified template for each asset group to plop numbers in each quarter for a quick and dirty analysis. But on the other hand, I am kind of reluctant to create work especially if it is not even required by FAS 144. My understanding is that the analysis part comes after the identification of a triggering event. I was wondering if other companies actually do a modified version of Step 2 anyway (similar to your situation) regardless of triggering events.
    I am having discussions with the auditors regarding what would be considered proper documentation, and so far we have not gotten a clear answer yet. They are not critiquing our testing method, but the control documentation itself. They surely did spend a lot of time trying to get comfortable that our controls are in place, and did bill us for it. I am trying to strike a balance between the additional work our folks will need to do, and the efforts that the auditors will need to make next year.

  • Hoiya,
    Your internal time will always be cheaper than the auditor’s time. Do as much as you can internally that they can rely on. They still have to do some work, so you can’t totally trade your time for theirs.
    Our indicator of a possible impairment is the rolling 2 year operating profit. We only do this analysis to determine if we have any impairment indicators. If we have an indicator, then we go to step 2, the recoverability test. Step 2 generally only happens for a few locations each review cycle. We go through step 1 twice yearly. This gives us a heads-up of possible impariment indicators down the road if we see operating profits trending poorly. With the heads-up, we can also focus on those locations with the biggest impairment risk. This helps to minimize future impairment surprises.

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