CPA Financial Accounting & Reporting (FAR) • Select Financial Statement Accounts

Account For Asset Disposals And Impairment

Master the recognition, measurement, and reporting of long-lived asset write-downs and dispositions under U.S. GAAP.

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Inside this lesson 10 sections 5 questions 8 figures

SECTION 1

Historical Context & Motivation

For decades, the balance sheet carried long-lived assets at historical cost less accumulated depreciation, with little mechanism for recognizing that an asset's economic value might have permanently declined. The accounting profession had no formal, uniform standard requiring companies to test whether their property, plant, and equipment—or intangible assets—still justified the amounts reported on the books. The absence of such guidance meant that investors could be misled by inflated asset values, particularly after economic downturns or technological disruption rendered certain assets economically obsolete. Regulatory bodies recognized that a faithful representation of financial position demanded rules governing both the disposal and the impairment of assets whose carrying amounts could no longer be recovered through future cash flows or fair value.

1970 • APB Opinion No. 30

The Accounting Principles Board issued guidance on reporting the results of operations, establishing how gains and losses from asset disposals should be classified—ordinary versus extraordinary—on the income statement.

1995 • SFAS No. 121 – Impairment of Long-Lived Assets

FASB introduced the first comprehensive impairment framework, requiring entities to test long-lived assets for recoverability when events or changes in circumstances indicated potential impairment.

2001 • SFAS No. 144 – Accounting for the Impairment or Disposal of Long-Lived Assets

FASB superseded SFAS 121, refining the impairment model and unifying the treatment of assets held for use, held for disposal by sale, and discontinued operations into a single standard.

2009 • ASC Codification – ASC 360-10

The Financial Accounting Standards Codification reorganized SFAS 144 and related guidance under ASC 360-10 (Property, Plant, and Equipment – Overall) and ASC 360-10-35 through 360-10-45, which remain authoritative today.

2017 • ASU 2017-04 – Simplifying Goodwill Impairment

FASB eliminated Step 2 of the goodwill impairment test, streamlining the process to a single-step quantitative comparison and reinforcing the trend toward simpler, more timely impairment recognition.

Against this backdrop, today's CPA candidates must answer a central question: when and how should the carrying amount of a long-lived asset be reduced, and what journal entries capture a disposal or impairment event? The following sections build the complete framework you need for both the FAR exam and professional practice.

SECTION 2

Core Principles & Definitions

The treatment of asset disposals and impairment rests on several interconnected principles drawn primarily from ASC 360-10 (Property, Plant, and Equipment) and ASC 350 (Intangibles—Goodwill and Other). Understanding these foundational ideas will anchor every journal entry and disclosure requirement you encounter on the CPA exam.

1

Carrying Amount

The net amount at which an asset appears on the balance sheet: historical cost minus accumulated depreciation (and any previously recognized impairment losses). This is the starting point for every recoverability and fair-value test.
2

Recoverability Test

For assets held for use, compare the asset's carrying amount to the sum of its expected undiscounted future cash flows. If the carrying amount exceeds those cash flows, the asset fails the recoverability test and must be measured for impairment.
3

Fair Value Measurement

Once recoverability fails, the impairment loss equals the excess of carrying amount over fair value (per ASC 820). Fair value represents the price received in an orderly transaction between market participants at the measurement date.
4

Assets Held for Disposal

When management commits to a plan to sell an asset, the asset is reclassified as held for sale and measured at the lower of carrying amount or fair value less costs to sell. Depreciation ceases upon reclassification.
5

Gain or Loss on Disposal

Upon the actual sale, exchange, or abandonment of a long-lived asset, the entity recognizes a gain or loss equal to the difference between net proceeds (if any) and the asset's carrying amount at the date of disposal.
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KEY TAKEAWAY

Think of asset impairment testing like a home appraisal after a neighborhood decline. You first check whether your expected rental income (undiscounted cash flows) can still cover the mortgage balance (carrying amount). If it cannot, you hire an appraiser to determine the home's current market value (fair value), and you record the shortfall as a permanent loss. A disposal, by contrast, is like actually selling the house: the difference between what you receive and what you still owe becomes your realized gain or loss.

SECTION 3

Visual Explanation — Impairment Decision Flowchart

ASC 360 — Impairment Testing Flowchart (Assets Held for Use)Triggering Event Identified?YESStep 1: Recoverability TestCarrying Amount vs. Undiscounted Future Cash FlowsCA > CFCA ≤ CFNo ImpairmentStep 2: Measure ImpairmentLoss = CA − Fair ValueRecord Impairment LossDr. Impairment Loss XXX Cr. Asset (or Acc. Dep.) XXXNew carrying amount becomesthe depreciable base. Loss isNOT reversible under U.S. GAAP.
The flowchart above traces the two-step impairment process under ASC 360. Begin with a triggering event, apply the recoverability test (undiscounted cash flows), and if it fails, measure the impairment loss as carrying amount minus fair value. Note the irreversibility of the write-down under U.S. GAAP.

The diagram emphasizes that the impairment framework for assets held for use is a two-step process. Step 1 uses undiscounted cash flows as a screening mechanism—a deliberately generous threshold that only flags the most clearly impaired assets. If the asset fails this initial screen, Step 2 measures the loss by comparing the carrying amount to the asset's fair value, which is typically determined using a discounted cash flow model, comparable market transactions, or an independent appraisal. Once recorded, the reduced carrying amount becomes the new depreciable basis and is depreciated over the asset's remaining useful life. Unlike IFRS (IAS 36), U.S. GAAP does not permit reversal of impairment losses on long-lived assets other than certain financial assets.

SECTION 4

Mathematical Framework

Impairment Loss — Assets Held for Use

RECOVERABILITY TEST

IfCarryingAmount>ΣUndiscountedFutureCashFlows→AssetisimpairedIf Carrying Amount > Σ Undiscounted Future Cash Flows → Asset is impaired

Carrying Amount = Cost − Accumulated Depreciation − Prior Impairments. Undiscounted future cash flows include all cash inflows expected from the asset's use and eventual disposal, without applying a discount rate.

IMPAIRMENT LOSS MEASUREMENT

ImpairmentLoss=CarryingAmount−FairValueImpairment Loss = Carrying Amount − Fair Value

Fair Value is determined under ASC 820 using Level 1 (quoted prices), Level 2 (observable inputs), or Level 3 (unobservable inputs) of the fair value hierarchy. The new carrying amount equals the original carrying amount minus the impairment loss.

Assets Held for Sale

HELD-FOR-SALE MEASUREMENT

ReportedValue=LowerofCarryingAmount,FairValue−CoststoSellReported Value = Lower of { Carrying Amount , Fair Value − Costs to Sell }

Costs to sell include broker commissions, legal fees, and other incremental direct costs. Depreciation stops upon classification as held for sale. Subsequent increases in fair value (net of costs to sell) may reverse previously recognized held-for-sale write-downs, but only up to the cumulative loss previously recorded.

Gain or Loss on Disposal

DISPOSAL GAIN / LOSS

Gain(Loss)onDisposal=NetProceeds−CarryingAmountatDateofDisposalGain (Loss) on Disposal = Net Proceeds − Carrying Amount at Date of Disposal

Net Proceeds = Selling Price − Selling Costs. If the asset is abandoned or retired without sale, Net Proceeds = $0 and the entire remaining carrying amount is recognized as a loss. Gains and losses on disposal are typically reported in operating income unless they qualify as discontinued operations under ASC 205-20.

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CPA Exam Tip

A common exam trap is confusing the recoverability test (undiscounted cash flows) with the impairment measurement step (fair value). Remember: undiscounted cash flows determine whether to impair; fair value determines how much to impair.

SECTION 5

Detailed Breakdown — Disposal Methods & Held-for-Sale Criteria

When a company decides to part with a long-lived asset, the accounting treatment depends on the method of disposal and whether specific criteria for held-for-sale classification are met. ASC 360-10-45-9 enumerates six conditions, all of which must be satisfied at the balance sheet date for reclassification. If any criterion is not met, the asset remains classified as held and used, continues to be depreciated, and follows the standard impairment model discussed in Section 3.

Disposal Methods & Accounting TreatmentSaleClassify as Held for Saleif 6 criteria metLower of CA orFV − Costs to Sell✓ Depreciation STOPSWrite-down recoverableAbandonmentAsset retired from service;no proceeds expectedLoss = Remaining CA(Net Book Value → $0)Full write-off at disposal dateExchangeNonmonetary exchangeper ASC 845New asset at FV ofasset given up (+ boot)Commercial substance?Determines gain recognitionSix Criteria for Held-for-Sale Classification (ASC 360-10-45-9)①Management with authority has committed to a plan to sell the asset.②The asset is available for immediate sale in its present condition.③An active program to locate a buyer has been initiated.④The sale is probable and expected to qualify for full recognition within one year.⑤The asset is actively being marketed at a price reasonable in relation to its current fair value.⑥It is unlikely that significant changes will be made to the plan, or that the plan will be withdrawn.All six criteria must be met at the reporting date for held-for-sale classification.
This diagram contrasts the three primary disposal methods—sale, abandonment, and exchange—and lists the six mandatory criteria for held-for-sale classification under ASC 360-10-45-9.

When an asset is reclassified as held for sale, it is presented separately on the balance sheet—typically as a line item in current assets if the sale is expected within one year. The entity writes the asset down to fair value less costs to sell at the reclassification date if that amount is lower than carrying amount, recording the write-down as a loss on the income statement. Subsequent recoveries of that write-down are permitted, but only to the extent of cumulative losses previously recognized under the held-for-sale framework. This recovery provision is a notable exception to the general U.S. GAAP prohibition on reversing impairment losses for long-lived assets held for use.

SECTION 6

Worked Example — Impairment & Subsequent Disposal

Apex Manufacturing owns a specialized stamping machine that it purchased five years ago for $500,000. The machine has been depreciated on a straight-line basis over a 10-year useful life with no salvage value, so accumulated depreciation is $250,000 and the carrying amount is $250,000. Due to a shift in consumer demand, management determines that the machine's expected undiscounted future cash flows over its remaining life total $200,000, and its fair value is $160,000. Two years later, Apex sells the machine for $130,000 net of selling costs.

Impairment Test & Disposal of Stamping Machine

  1. 1

    Step 1 — Identify the Triggering Event

    A significant shift in consumer demand has reduced the expected future cash flows from the stamping machine. Under ASC 360-10-35-21, a change in the business climate that affects the asset's future use constitutes a triggering event requiring an impairment analysis.
  2. 2

    Step 2 — Apply the Recoverability Test

    Compare the carrying amount of $250,000 to the sum of undiscounted future cash flows of $200,000. Because $250,000 > $200,000, the asset fails the recoverability test, and an impairment loss must be measured.
    Recoverability test failed: $250,000 > $200,000
  3. 3

    Step 3 — Measure the Impairment Loss

    Impairment Loss = Carrying Amount − Fair Value = $250,000 − $160,000 = $90,000. Note that we use fair value (not undiscounted cash flows) for the measurement step.
    Impairment Loss = $90,000
  4. 4

    Step 4 — Record the Impairment Journal Entry

    Dr. Impairment Loss on Long-Lived Assets … $90,000 Cr. Accumulated Depreciation — Machine … $90,000 After the entry, the net carrying amount is $500,000 − $250,000 − $90,000 = $160,000. This becomes the new depreciable base, depreciated over the remaining 5-year useful life at $32,000 per year.
    New carrying amount = $160,000; New annual depreciation = $32,000
  5. 5

    Step 5 — Depreciate Over Remaining Life (2 Years)

    Over the next two years before sale, the machine is depreciated at $32,000 per year × 2 = $64,000. The carrying amount at date of sale = $160,000 − $64,000 = $96,000.
    Carrying amount at disposal date = $96,000
  6. 6

    Step 6 — Record the Disposal

    Net proceeds from the sale = $130,000. Gain on disposal = $130,000 − $96,000 = $34,000. Dr. Cash … $130,000 Dr. Accumulated Depreciation — Machine … $404,000 Cr. Machine (Cost) … $500,000 Cr. Gain on Disposal of Equipment … $34,000 Accumulated depreciation at disposal = $250,000 (original) + $90,000 (impairment) + $64,000 (post-impairment depreciation) = $404,000.
    Gain on Disposal = $34,000

SECTION 7

Comparing Impairment Models — U.S. GAAP vs. IFRS

While the CPA FAR exam focuses on U.S. GAAP, understanding the differences with IFRS (specifically IAS 36 — Impairment of Assets) is increasingly relevant given international convergence efforts and the global nature of modern financial reporting. The table below highlights the most significant divergences between the two frameworks.

FeatureU.S. GAAP (ASC 360)IFRS (IAS 36)
Impairment indicatorTest only when triggering events or circumstances suggest carrying amount may not be recoverable.Assess at each reporting date whether any indication of impairment exists; goodwill and indefinite-life intangibles tested annually regardless.
Screening stepRecoverability test using undiscounted future cash flows (Step 1).No separate screening step; proceed directly to comparing carrying amount with recoverable amount.
Measurement basisFair value (ASC 820).Recoverable amount = higher of fair value less costs of disposal and value in use (discounted cash flows).
Reversal of impairmentProhibited for assets held for use. Limited reversal for held-for-sale write-downs.Permitted (except for goodwill). Reversal limited to original carrying amount adjusted for depreciation.
Asset groupingLowest level at which identifiable cash flows are largely independent of other asset groups.Cash-generating unit (CGU) — smallest identifiable group of assets generating independent cash inflows.

Key differences between U.S. GAAP and IFRS impairment frameworks

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KEY TAKEAWAY

The most exam-critical difference is the U.S. GAAP two-step process versus the IFRS single-step approach. Under U.S. GAAP, many assets pass the lenient undiscounted-cash-flow screen even when their fair values are somewhat depressed, meaning impairment losses are recognized later and less frequently than under IFRS. Think of the U.S. GAAP recoverability test as a generous 'first filter' that keeps marginal cases from triggering an immediate write-down, while IFRS goes straight to the more conservative discounted measure.

SECTION 8

Connections to Goodwill Impairment & Discontinued Operations

The asset disposal and impairment framework under ASC 360 operates alongside two closely related areas that frequently appear on the CPA exam: goodwill impairment (ASC 350-20) and discontinued operations (ASC 205-20). Understanding how these topics intersect with long-lived asset impairment is essential for a holistic view of financial statement effects.

DimensionLong-Lived Asset Impairment (ASC 360)Goodwill Impairment (ASC 350-20)
Unit of accountIndividual asset or asset group (lowest level with identifiable cash flows).Reporting unit (operating segment or one level below).
Testing triggerEvents or changes in circumstances indicating non-recoverability.Annual test required; interim test if triggering events occur.
MeasurementTwo-step: undiscounted CF screen → fair value loss.Single-step (post-ASU 2017-04): carrying amount of reporting unit (including goodwill) vs. fair value of reporting unit. Loss = excess, capped at goodwill balance.
ReversalNot permitted (held for use). Partial reversal for held for sale.Not permitted.
OrderingTest long-lived asset groups first, then test goodwill at reporting-unit level.Performed after other asset impairment tests within the same reporting unit.

ASC 360 vs. ASC 350-20 impairment comparison

When an asset disposal qualifies as a discontinued operation under ASC 205-20, the results of operations and any gain or loss on disposal are reported separately in the income statement, net of tax, below income from continuing operations. The threshold for discontinued-operation classification was raised by ASU 2014-08, which now requires the disposal to represent a strategic shift with a major effect on operations and financial results (e.g., a major geographic area, line of business, or equity-method investee). This higher threshold means fewer disposals qualify as discontinued operations; most asset disposals instead flow through operating or other income on a gross basis.

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Testing Order Matters

When a reporting unit contains both impaired long-lived assets and goodwill, always test the long-lived asset group under ASC 360 first. Impairment losses on tangible and identifiable intangible assets reduce the carrying amount of the reporting unit before the goodwill impairment test under ASC 350-20 is performed. Failing to follow this order can result in understating the goodwill impairment loss on the exam.

SECTION 9

Practice Problems

Question 1: CONCEPTUAL

Explain why U.S. GAAP uses undiscounted future cash flows in the recoverability test (Step 1) rather than discounted cash flows or fair value. What is the conceptual justification, and what practical consequence does this choice have on the frequency of impairment recognition?
Show answer
The FASB chose undiscounted cash flows for the recoverability test because it intended this step to be a threshold screen, not a precise measurement. By omitting the discount rate, the test is deliberately lenient: it only flags assets whose carrying amounts cannot be recovered even in nominal, unadjusted dollar terms. The conceptual justification is that discounting introduces subjectivity (choice of discount rate), and the FASB preferred to reserve present-value calculations for the measurement step, where fair value (ASC 820) provides a more rigorous framework. Practically, this means many assets with carrying amounts below undiscounted cash flows—but above fair value—will not trigger impairment, reducing the frequency of write-downs compared to IFRS, which uses discounted cash flows (value in use) or fair value less costs of disposal as the direct comparator.

Question 2: BASIC CALCULATION

A company owns equipment with a cost of $800,000, accumulated depreciation of $300,000, undiscounted future cash flows of $450,000, and fair value of $380,000. Calculate the impairment loss, if any.
Show answer
Carrying amount = $800,000 − $300,000 = $500,000. Step 1 (Recoverability): $500,000 > $450,000 (undiscounted future cash flows), so the asset fails the recoverability test. Step 2 (Measurement): Impairment loss = $500,000 − $380,000 = $120,000. The company debits Impairment Loss for $120,000 and credits Accumulated Depreciation for $120,000. The new carrying amount is $380,000, which becomes the revised depreciable base over the remaining useful life.

Question 3: INTERMEDIATE

Delta Corp. classifies a warehouse as held for sale on July 1. The warehouse has a carrying amount of $1,200,000. Its fair value is $1,050,000 and estimated costs to sell are $50,000. By December 31, fair value has risen to $1,150,000 while costs to sell remain $50,000. Determine the amounts reported at both dates and all journal entries.
Show answer
July 1: Fair value less costs to sell = $1,050,000 − $50,000 = $1,000,000. Since $1,000,000 < carrying amount of $1,200,000, a write-down of $200,000 is required. Journal entry: Dr. Loss on Write-Down of Assets Held for Sale $200,000; Cr. Warehouse $200,000. Carrying amount = $1,000,000. Depreciation ceases from this date. December 31: Fair value less costs to sell = $1,150,000 − $50,000 = $1,100,000. The asset can be written back up, but only to the extent of the cumulative loss previously recognized ($200,000). Recovery = $1,100,000 − $1,000,000 = $100,000. Journal entry: Dr. Warehouse $100,000; Cr. Gain on Recovery of Held-for-Sale Write-Down $100,000. Reported carrying amount at December 31 = $1,100,000.

Question 4: APPLIED

Brightstar Inc. acquired a fleet of delivery trucks five years ago for $2,000,000 (10-year life, no salvage, straight-line). Regulatory changes make the trucks non-compliant after three more years instead of five. Undiscounted future cash flows over the shortened three-year remaining life total $700,000. Fair value of the fleet is $550,000. (a) Record the impairment entry. (b) Calculate revised annual depreciation. (c) If Brightstar sells the fleet one year later for $425,000 net, record the disposal entry.
Show answer
(a) Carrying amount = $2,000,000 − (5 × $200,000) = $1,000,000. Recoverability: $1,000,000 > $700,000, so the test fails. Impairment loss = $1,000,000 − $550,000 = $450,000. Entry: Dr. Impairment Loss $450,000; Cr. Accumulated Depreciation—Trucks $450,000. New carrying amount = $550,000. (b) Revised annual depreciation = $550,000 ÷ 3 remaining years = $183,333 per year. (c) After one more year of depreciation: carrying amount = $550,000 − $183,333 = $366,667. Gain on disposal = $425,000 − $366,667 = $58,333. Entry: Dr. Cash $425,000; Dr. Accumulated Depreciation—Trucks $1,633,333 ($1,000,000 original + $450,000 impairment + $183,333 post-impairment); Cr. Trucks $2,000,000; Cr. Gain on Disposal $58,333.

Question 5: CRITICAL THINKING

Consider a reporting unit with the following: goodwill of $500,000, a long-lived asset group with a carrying amount of $3,000,000, undiscounted future cash flows of $2,800,000, fair value of the asset group of $2,400,000, and fair value of the entire reporting unit of $3,200,000 (compared to a total carrying amount of $3,500,000 including goodwill). Determine all impairment losses, explain the required testing order, and discuss whether the goodwill impairment test outcome would differ if the long-lived asset impairment were not recognized first.
Show answer
Step 1 — Long-lived asset group (ASC 360): Carrying amount $3,000,000 > undiscounted cash flows $2,800,000; recoverability test fails. Impairment loss = $3,000,000 − $2,400,000 = $600,000. Revised carrying amount of asset group = $2,400,000. Step 2 — Goodwill (ASC 350-20): After the ASC 360 write-down, total reporting unit carrying amount = $2,400,000 + $500,000 = $2,900,000. Fair value of reporting unit = $3,200,000. Since $3,200,000 > $2,900,000, no goodwill impairment. If the long-lived asset impairment were skipped, total carrying amount would be $3,000,000 + $500,000 = $3,500,000, exceeding the $3,200,000 fair value by $300,000. This $300,000 would be recorded as goodwill impairment, understating the long-lived asset impairment by $600,000 and overstating the goodwill impairment by $300,000 (while missing $300,000 of the total decline). This illustrates why the testing order is critical: long-lived assets must be impaired first so that the reporting unit's carrying amount accurately reflects the remaining goodwill to be tested.

SUMMARY

Lesson Summary

Summary

Asset disposals and impairment center on the principle that financial statements must faithfully represent the economic value of long-lived assets. Under ASC 360-10, assets held for use are subject to a two-step impairment test: the recoverability test compares carrying amount to undiscounted future cash flows (a lenient screen), and if it fails, the impairment loss is measured as carrying amount minus fair value. This loss is irreversible under U.S. GAAP, and the reduced carrying amount becomes the new depreciable basis.

For assets held for sale, six criteria must be met for reclassification, after which the asset is reported at the lower of carrying amount or fair value less costs to sell, with depreciation suspended and limited write-down recoveries permitted. Upon actual disposal, the gain or loss equals net proceeds minus carrying amount. Remember that goodwill impairment under ASC 350-20 uses a simplified single-step model, and long-lived assets must always be tested before goodwill within the same reporting unit to preserve measurement accuracy.

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