ACC 610 Module 6 Milestone Two Example

Impairment Testing of the Grand Island Service Center and the Sensor Reporting Unit

[Student Name]

Southern New Hampshire University

ACC 610: Financial Reporting I

Milestone Two

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Impairment Testing of the Grand Island Service Center and the Sensor Reporting Unit

Introduction

Two events in late 2025 required the company to consider impairment. Its Grand Island, Nebraska, service center, opened in 2022 to repair drones for western Corn Belt customers, lost most of its volume after the cooperative contracts moved routine repairs to cooperative staff trained by the company. And in November, a large competitor began including a free multispectral camera with its spraying drones, which pressures the pricing of the company's sensor reporting unit. This milestone tests the service center under ASC 360 and the sensor unit's goodwill under ASC 350 as amended by ASU 2017-04 (Financial Accounting Standards Board, 2017).

Order of Testing

ASC 350-20-35-31 requires that other assets be tested, and any impairment recognized, before the goodwill of the reporting unit containing them. The service center belongs to the drone reporting unit, not the sensor unit, and the drone unit's fair value exceeds its carrying amount by a wide margin, so the two tests do not interact. The order still matters for documentation: had the service center been in the sensor unit, its write-down would have reduced that unit's carrying amount before the goodwill test.

Service Center: Asset Group and Recoverability

Under ASC 360-10-35-23, the test is run on the smallest set of assets whose cash flows can be told apart from those of the rest of the company. The service center bills repairs separately and its building, equipment and parts inventory serve no other operation, so the center is the asset group. A triggering event exists under ASC 360-10-35-21: a significant decrease in the extent of use and a current-period operating loss with a forecast of continuing losses.

The recoverability test compares the carrying amount, $3.4 million, with the undiscounted cash flows expected from use and eventual disposal. Management's forecast assumes repair revenue stabilizes at 40 percent of the 2024 level, a remaining useful life of the building's primary asset of 12 years, and sale at the end. Undiscounted cash flows total $2.9 million, less than the carrying amount, so the group is not recoverable.

Service Center: Measuring the Loss

ASC 360-10-35-17 measures the loss as the amount by which the group's book value is above its fair value. A commercial broker estimated the building and land at $1.6 million based on three sales of light industrial buildings in Grand Island and Kearney, and the equipment's fair value was estimated at $500,000 from used equipment dealer quotes, for a total of $2.1 million. A discounted cash flow model at a 10 percent rate gave $2.0 million, which supports the market approach. The loss is $1.3 million, allocated to the building and equipment pro rata on carrying amounts but not reducing any asset below its own fair value. The written-down amounts become the new cost basis and are depreciated over the remaining lives; the loss cannot be reversed.

Service center test summary

Sensor Reporting Unit: Goodwill Test

The sensor company was acquired two years ago for $14 million, of which $6.2 million was goodwill. The competitor's free camera is an adverse change in the business climate, so a qualitative screen would not support skipping the test, and the company proceeded directly to the quantitative test. Under ASU 2017-04, the loss equals whatever the unit's carrying amount is above its fair value, capped at the goodwill allocated to it.

The reporting unit's carrying amount, including goodwill, customer relationships, developed technology and working capital, is $18.5 million. Its fair value was estimated by weighting an income approach, discounted cash flows over five years at 14 percent with a 3 percent terminal growth rate, and a market approach using revenue multiples of four listed precision agriculture sensor makers. The forecast cuts external camera prices 25 percent from 2026 to stay competitive. The weighted fair value is $15.9 million, so the carrying amount exceeds it by $2.6 million, less than the $6.2 million of goodwill. Goodwill is impaired $2.6 million and falls to $3.6 million.

Sensor reporting unit test summary

The Earnout and the Impairment in the Same Year

A reader may ask how the sensor earnout liability rose in 2025 while goodwill in the same unit was impaired. The two look at different periods. The earnout depends on 2025 sensor revenue, which was strong before the competitor's move, while the goodwill test values cash flows from 2026 onward, after price cuts. Both are correct, but the disclosure should explain the connection so investors do not read the earnout charge as good news offset by unrelated bad news.

Judgments and Sensitivity

The goodwill result is most sensitive to the price cut and the discount rate. A 15 percent price cut instead of 25 percent would raise fair value to about $17.4 million and reduce the impairment to $1.1 million; a 13 percent discount rate would reduce it to about $1.8 million. Ramanna and Watts (2012) found that managers use the discretion in goodwill testing to delay impairments, and Li et al. (2011) found that investors and analysts revise expectations downward when impairments are announced, both reasons for the audit committee to examine these assumptions closely rather than accept the lowest loss the range allows.

What Happens Next

Neither write-down can be reversed. If service volume in Grand Island recovers, the benefit will appear only as higher margins on a lower depreciation base. Management is also weighing a sale of the building; if it commits to a plan and the held-for-sale criteria in ASC 360-10-45-9 are met, the center would be measured at the lower of its new carrying amount and fair value less costs to sell, and depreciation would stop. For the sensor unit, the company should move its annual goodwill test date to align with the budget cycle and monitor the competitor's pricing each quarter, because a further cut would trigger an interim test before the $3.6 million of remaining goodwill is tested again.

Journal Entries and Disclosure

The service center entry debits impairment loss $1.3 million and credits the building and equipment accounts. The goodwill entry debits goodwill impairment loss $2.6 million and credits goodwill. Both losses are reported in operating income. The note should describe the triggering events, the assets affected, the methods and key assumptions used to measure fair value, the Level 3 classification of both measurements and the segment in which each loss arose (Kieso et al., 2019).

References

Financial Accounting Standards Board. (2017). Intangibles: Goodwill and other (Topic 350): Simplifying the test for goodwill impairment (Accounting Standards Update No. 2017-04). Author.

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting (17th ed.). Wiley.

Li, Z., Shroff, P. K., Venkataraman, R., & Zhang, I. X. (2011). Causes and consequences of goodwill impairment losses. Review of Accounting Studies, 16(4), 745-778. https://doi.org/10.1007/s11142-011-9167-2

Ramanna, K., & Watts, R. L. (2012). Evidence on the use of unverifiable estimates in required goodwill impairment. Review of Accounting Studies, 17(4), 749-780. https://doi.org/10.1007/s11142-012-9188-5