Restructurings and Impairment of Value: A Growing Controversy.

Abstract This article addresses the problems of recognizing and measuring impairment of value of operating assets. The basis for determining the amount to be written down should reflect the permanent loss in value to the company. However, not contributing to the company's profit is an extremely judgmental concept that raises troublesome questions. To illustrate, consider the situation where a company builds a plant assuming a 40 percent gross profit on the plant's output, reaches that projection in the early years of the plant's life, but finds gross profit eroding over time. Inventory can be written down to its net realizable value less a normal profit margin. A major measurement issue is whether the determination of cash flows for individual assets used in conjunction with other assets should consider the earning power of those other assets. According to FASB Statement 12, a company should look at the market value of the entire portfolio, not at each individual security, in applying lower of cost or market measurement. Another issue that must be addressed is whether to discount net expected future cash flows. In several instances discounting is used under generally accepted accounting principles. When a company plans eventually to dispose of the asset, adjusting the carrying value to its net realizable value is appropriate, and depreciation would cease when the asset becomes nonoperational. Because of measurement difficulties, an impairment may occur but not be identified by a company until a much later period. Another approach to dealing with a potential loss in value when significant uncertainties surround the measurement of the loss is to reassess the useful life of the asset.