In recent years, the Financial Accounting Standards Board (FASB) has made great strides toward improving the quality and clarity of financial statements.

Among the murkiest of accounting conventions were FASB Statement No. 121 (Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of) and the accounting and reporting provisions of APB Opinion No. 30 (Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions).

Long-lived asset categories
Although FASB Statement No. 144 (Accounting for the Impairment or Disposal of Long-Lived Assets) contains many of the same basic features as its two predecessors, it aims to remedy generally accepted accounting principles’ (GAAP’s) former ambiguities.

To clarify matters, Statement No. 144 provides companies with four categories for their long-lived assets (such as property, plant, equipment and long-term prepaid assets):

1. Long-lived assets to be held and used. This category will usually comprise the bulk of a client’s long-lived assets. Statement No. 144 requires companies to assess their annual (or, if applicable, interim) impairment for each long-lived asset or asset group. (See “Asset impairment flowchart” at right for guidance about how to assess impairment.)
   
   
2. Long-lived assets to be disposed of by sale. If a client plans to sell a long-lived asset within a year (with a few exceptions), the asset may fall within this category. To ensure the category fits for a specific asset, Statement No. 144 provides six criteria that must be met.
   
   For instance, the asset (or asset group) must be available for immediate sale in its current condition and reasonably priced relative to its fair market value. Further, with some exceptions, management must commit to a plan to sell the asset within a year.
   
   If the asset meets all six criteria, depreciation stops and the asset’s book value is reduced to fair value, but only if fair value (net of selling expenses) is less than book value.
   
   
3. Long-lived assets to be disposed of other than by sale. Contrary to Statement No. 121, the new rule requires companies to report assets it plans to dispose of through alternate means as “held and used” until disposal. Such alternate disposals include abandonment, exchange or distribution to its owners in a spin-off.
   
   
4. Discontinued operations. If a company will no longer be involved in a “component of the entity” following a long-lived asset disposal, it must report the discontinued operations in a special section of its income statement. To provide financial statement users with better information, the new rules expand the scope of disposals that fall within this category.

Nearly every company owns long-lived assets and, therefore, must comply with Statement No. 144. Many clients will need to hire a valuation professional to help them assess fair value and impairment issues related to their long-term assets.