Long-Lived Asset Impairment, Explained: The Two-Step Recoverability Test Under ASC 360

Your balance sheet says the packaging line is worth $180,000. But the big contract it was bought to serve just ended, the machine now runs two days a week, and a used-equipment dealer offered you $90,000 for it. Can you keep carrying it at $180,000? Under U.S. GAAP, probably not — and the test that decides is more mechanical, and more forgiving in step one, than most owners expect.

This guide walks through the impairment model in ASC 360-10-35: when you must test, the two-step recoverability test, the asset-group rule that trips up nearly everyone, and why the write-down you book is permanent.

What "Impaired" Actually Means​

An asset is impaired when its carrying amount — original cost minus accumulated depreciation — can no longer be recovered through using or selling it. ASC 360 defines the condition as the carrying amount of a long-lived asset (or asset group) exceeding its fair value, combined with a failed recoverability test.

Three scope notes before you go further:

• ASC 360 covers tangible long-lived assets (property, plant, and equipment) and finite-lived intangibles like patents or customer lists — the kind with a determinable useful life that you amortize.
• ASC 350 covers goodwill and indefinite-lived intangibles like certain trademarks. Goodwill has its own test (a single-step comparison of a reporting unit's fair value to its carrying amount), so don't apply this guide's two steps to it.
• Held and used vs. held for sale matters. The two-step test below is for assets you are keeping and operating. Assets classified as held for sale are measured at the lower of carrying amount or fair value less cost to sell, with no recoverability screen.

Step 0: You Only Test When Something Triggers It​

Unlike goodwill, which gets an annual test, long-lived assets under ASC 360 are tested only when events or changes in circumstances indicate the carrying amount may not be recoverable. ASC 360-10-35-21 lists example triggering events:

• A significant decrease in the asset's market price
• A significant adverse change in how the asset is used, or in its physical condition
• A significant adverse change in legal factors or the business climate, including adverse regulatory action
• An accumulation of costs to acquire or construct the asset that significantly exceeds the original budget
• A current-period operating or cash flow loss combined with a history of such losses, or a forecast showing continuing losses from using the asset
• An expectation, more likely than not, that the asset will be sold or otherwise disposed of well before the end of its previously estimated useful life

Translated to small-business reality: your anchor tenant leaves the building you own, new regulation bans the process your equipment runs, the custom build costs double the quote, a store location loses money three years running, or you decide to sell the delivery fleet two years early. Any one of these means you run the test — not at year-end out of habit, but when the event happens.

Step 1: The Recoverability Test (Undiscounted Cash Flows)​

Here is the step people get backwards. You do not start by comparing carrying amount to fair value. Step one compares the carrying amount to the sum of the undiscounted future cash flows you expect from using the asset and eventually disposing of it.

• If undiscounted cash flows equal or exceed the carrying amount, the asset is recoverable. Stop. No impairment, even if fair value is lower than book value.
• If the carrying amount exceeds the undiscounted cash flows, the asset is not recoverable. Proceed to step two.

A worked example: the packaging line carries at $180,000. You project it will generate $40,000 of net cash a year for four more years, plus $30,000 of scrap and resale proceeds at the end. Total undiscounted cash flows: $190,000. That exceeds $180,000, so the line passes — no impairment — even though a dealer would only pay $90,000 for it today.

Why undiscounted? Step one is deliberately a coarse screen. Discounting to present value would fail far more assets, because a dollar in year five counts less than a dollar today. By using raw undiscounted totals, GAAP asks only "will this asset, over its whole remaining life, throw off enough cash to cover what you carry it at?" Fair value enters only in step two.

Two details that matter when you build the cash flow projection:

• Use cash flows from use plus disposal. Include the eventual sale or scrap proceeds. Owners routinely forget the terminal value and fail a test they would have passed.
• Keep the projection consistent with how you actually plan to use the asset. If you forecast a turnaround, it should match the operating plans and budgets you use to run the business — your auditor will ask for exactly that reconciliation.

Step 2: Measure the Loss Against Fair Value​

Only assets that fail step one reach step two. Here the impairment loss is simply:

Impairment loss = carrying amount minus fair value

Fair value follows the ASC 820 hierarchy: quoted prices for identical assets if they exist (Level 1), other observable inputs like dealer quotes or comparable sales (Level 2), and your own modeled assumptions such as discounted cash flows when nothing observable is available (Level 3). For specialized small-business equipment, Level 3 is common — and that means documenting your assumptions carefully.

Return to the example, but change the facts: the contract loss means the line will generate only $25,000 a year for four years plus $20,000 of disposal proceeds — $120,000 undiscounted against a $180,000 carrying amount. Step one fails. An equipment appraisal puts fair value at $100,000. The impairment loss is $80,000.

The write-down establishes a new cost basis. You then depreciate that new basis over the remaining useful life. With four years left, annual depreciation becomes $25,000 instead of whatever it was — the P&L pain is front-loaded into the impairment charge, and future periods carry a lighter depreciation load.

The Asset Group Rule: Test at the Lowest Independent Level​

Here is the rule that causes the most restatements. ASC 360 requires you to group assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. You almost never test a single machine in isolation, because a single machine rarely has its own identifiable cash flows.

Practical groupings look like this:

• A retail store location — the leasehold improvements, fixtures, and point-of-sale equipment for that one shop, tested together against that shop's cash flows.
• A production line — every machine dedicated to one product family, tested against that product family's cash flows.
• A rental property — the building and its land, tested against that property's rents.

The two classic errors run in opposite directions. Test too high — the whole company as one group — and a dying location hides inside healthy cash flows elsewhere, so impairment never surfaces. Test too low — machine by machine — and you manufacture impairments by assigning shared revenue nowhere. Ask "what is the smallest unit whose cash I could actually measure on its own?" and test there.

One more grouping subtlety: liabilities can join the group. If the asset group's cash flows depend on servicing an obligation (an asset retirement obligation is the textbook case), that liability is included when comparing carrying amounts to cash flows.

Booking the Entry​

The journal entry itself is unglamorous: debit an impairment loss, credit the asset (or accumulated depreciation). Suppose the packaging-line group carries at $180,000 and fair value is $100,000:

2026-10-31 * "Impairment write-down -- packaging line asset group, ASC 360"
  Expenses:Impairment-Loss                80,000.00 USD
  Assets:PPE:Packaging-Line               -80,000.00 USD

In a traditional chart of accounts that is a debit to Loss on Impairment and a credit directly reducing the asset account, which resets its basis to $100,000. Going forward, depreciation runs off the new $100,000 basis over the remaining life.

If you keep your books in plain-text accounting, this is also where good account structure pays off: an asset group you can already isolate in your ledger — one subaccount per location, per line, per property — makes both the cash flow projection and the entry nearly mechanical. The Beancount documentation covers account hierarchies that support exactly this kind of grouping, and Fava lets you verify the new balances the moment you post.

Why GAAP Never Lets You Reverse It​

Under ASC 360-10-35-20, a recognized impairment loss on an asset held for use is permanent. If the packaging line's market rebounds next year and fair value climbs back to $150,000, you cannot write it back up. The $100,000 basis stands, and future depreciation continues from there.

This is one of the sharpest GAAP-versus-IFRS divides in all of accounting. Under IAS 36, companies must reverse an impairment loss (on assets other than goodwill) when the recoverable amount increases, up to the carrying amount that would have existed without the write-down. U.S. GAAP prohibits it — the only narrow exception involves assets reclassified as held for sale, which follow different measurement rules anyway.

The practical consequence: get the write-down right the first time. Because there is no true-up, an over-aggressive impairment permanently understates your asset base and understates future depreciation, while an understated one leaves a zombie carrying amount your auditor will challenge every period until you fix it. Document the fair value evidence — appraisals, dealer quotes, model inputs — as if you will defend it in three years, because you might.

Six Mistakes That Fail Audits​

1. Testing on a schedule instead of on triggers. Annual impairment testing of PP&E without a triggering event wastes effort; worse is the reverse — a clear trigger (lost contract, dead location, new regulation) with no test run. Tie the test to events, and keep a memo saying which events you considered each period.
2. Discounting in step one. Step one uses undiscounted cash flows, full stop. Running a present-value model at step one fails assets that GAAP considers recoverable and overstates your loss.
3. Forgetting disposal proceeds. The step-one cash flows include what you'll get when the asset is done — resale, scrap, salvage. Leaving them out is the most common reason healthy assets "fail" the screen.
4. Testing at the wrong level. The single machine with no standalone cash flows, or the entire company as one group — both misapply the lowest-independent-cash-flows rule, in opposite directions.
5. Forgetting to reset depreciation. After the write-down, depreciation runs off the new basis over the remaining life. Continuing the old schedule double-counts the loss across future periods.
6. Assuming the tax return follows the books. An impairment write-down is generally not tax-deductible when booked — the deduction typically waits until the asset is sold, scrapped, or depreciated. Book the deferred tax asset if you qualify, and don't promise yourself a tax benefit that hasn't arrived.

Your Month-End Impairment Checklist​

The next time a triggering event lands on your desk, work this list in order: confirm the trigger and write down which ASC 360-10-35-21 indicator it matches; define the asset group at the lowest level with largely independent cash flows; project undiscounted cash flows from use plus disposal and run step one; if it fails, evidence fair value and book carrying-minus-fair-value as the loss; reset the depreciable basis and the remaining-life schedule; file the memo, the model, and the fair value support together. Six steps, one sitting — and a carrying amount you can defend.