FASB issues statement on asset impairment.

The Financial Accounting Standards Board has issued Statement no. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which provides guidance for determining whether there is an impairment loss. The statement applies to financial statements for fiscal years beginning after December 15, 1995.

According to FASB practice fellow Carmen Bailey, "The conceptual model in the exposure draft of this statement has not changed, although some additional guidance is given, based on comments the board received concerning treatment of leased assets, real estate companies and not-for-profit organizations." The statement requires that assets and certain identifiable intangibles to be held and used must be reviewed for impairment whenever there is an indication that the carrying amount of a given asset may not be recoverable.

"An entity will have to estimate future cash flows expected to result from using the asset 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, there is an impairment loss. That loss is measured by the difference between the asset's fair value and its carrying amount," said Bailey.

Assets to be disposed of, with certain exceptions, will be reported at the lower of cost or fair value less the cost to sell the asset. The statement also requires that a rate-regulated enterprise recognize an impairment for the amount of costs excluded when a regulator excludes all or part of a cost from the enterprise's rate base.

Statement no. 121 should improve financial reporting by making it easier to compare one entity's response to economic or other forces with another entity's response, the board added.

"The most important thing about this statement is that it brings uniformity to the calculation of impairment of long-lived assets," said Michael Crooch, a partner with Arthur Andersen & Co., Chicago. In the past, there was no specific accounting guidance on when to make the determination of impairment and how to calculate it, although the issue had been under discussion for years. As far back as 1980, he noted, the American Institute of CPAs accounting standards executive committee sent the FASB an issues paper on the subject, Accounting for the Inability to Fully Recover the Carrying Amounts of Long Lived Assets.

"Now, everyone will be required to follow the same guidance, which should make financial statements more uniform and comparable," Crooch said.

Edmund Coulson, a partner with Ernst & Young, New York, added that "Statement no. 121 is an important and fairly complex standard that provides guidance in an area in which there has not been any. The statement changes the way impairment is recognized, making greater use of forward-looking information, projected cash flows and fair value in financial statements. CPAs will have to look harder at projected cash flows because if future cash flows are just a little bit short of covering the book value of the assets, the company is required to write the book value down to fair value."

(For further discussion, see the related story, "Asset Impairment Disclosures," by Kimberly J. Smith, JofA, Dec.94, page 57.)

Copies of Statement no. 121 may be ordered for $11 each from the FASB Order Department, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116, telephone [phone], extension 555.