FASB issues proposal on long-lived asset impairment.

A Financial Accounting Standards Board exposure draft specifies how to account for impairment of longlived assets, identifiable intangible assets and the related goodwill.

The proposed statement requires assets being held and used by an entity to be reviewed for impairment when events or changed circumstances suggest the assets' carrying amounts may not be recoverable-in which case the entity must estimate the future net cash flows expected to result from the assets' use and eventual disposition. If this sum (undiscounted and without interest charges) is less than the assets' carrying amounts, the entity must recognize impairment losses based on the assets' fair value.

Assets an entity plans to dispose of will be measured at the lower of cost or fair value (less the cost to sell), with certain exceptions.

If adopted, the proposal will be effective for fiscal years beginning after December 15, 1994.

Narrowing alternatives. According to the FASB, practice inconsistencies have developed because accounting standards do not address when impairment losses relating to long-lived assets, identifiable intangible assets and the related goodwill should be recognized or how they should be measured.

"There have evolved different methods for measuring impairment losses and different methods for recognizing impairment," explained FASB project manager Paul Rohan, who noted surveys by the Financial Executives Institute had verified divergent measurement and recognition practices with respect to impairment. "Everyone who looked into the matter, including the American Institute of CPAs and the FASB emerging issues task force, concluded these practice differences were a problem," he continued. "The proposal achieves uniformity in measurement and recognition."

Commented Norman Strauss, chairman of the AICPA accounting standards executive committee (AcSEC), "In 1980 the AICPA asked the FASB to deal with the impairment of long-lived assets, and AcSEC is pleased FASB has done so. We believe there is a need for guidance in this area. Right now," he continued, "diverse methods are being used. Narrowing the alternatives will result in an improvement in practice." Strauss, a partner of Ernst & Young in New York City, added that AcSEC will be deliberating on the proposal and has not yet determined whether it agrees with the specific method FASB selected.

Burden on business? Rohan also noted concerns have been raised that the proposal will make it more difficult to write off or write down goodwill. "That's just not the case," Rohan said. "The proposal relates to writing down assets that are impaired, assets that aren't worth what they're on the books for. It does not change anything about Accounting Principles Board Opinion no. 17, Intangible Assets, with respect to accounting for goodwill and the accelerated writedown of goodwill unless the goodwill is associated with assets that already are impaired and being written down."

Rohan added that recent articles in the Wall Street Journal and elsewhere have expressed fears that are not warranted based on the proposal's actual language.

AcSEC chairman Strauss commented that most of the proposal doesn't concern goodwill in any event. However, he said disagreements were likely regarding which method of recording a loss is most appropriate. "It's possible the proposal will be controversial," Strauss said, "and people will argue for different answers. But that's the process, and the process is just beginning."

Conflicting views on this matter are certain to be aired at hearings on the proposal, which will be held at the FASB offices in Norwalk, Connecticut, on May 16 and 17.

Comments on the proposal are requested by March 15. One copy is available without charge from the FASB order department, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116 or by calling [phone], ext. 555.