CG Corp. owns a piece of land worth $50 million (book value). CG believes that it will

Fantastic news! We've Found the answer you've been seeking!

Question:

CG Corp. owns a piece of land worth $50 million (book value). CG believes that it will be able to sell the land to a development group for $80 million. This property comprises roughly 10% of CG's overall land holdings at that value. The buyers plan to establish an upscale retirement community in the area. The buyers have obtained approval from the relevant authorities to build 250 homes, a golf course, and an activity center. However, a couple of surveyors were poking around on the retirement community site last week and found a rare spider species on the property. The appraisal of the property is now reduced to $10 million.

Now, I'm supposed to be an intern at FBG LLP, a small CPA firm that CG hired as their auditor. Mr. Walker is a finance manager at CG.

I've proposed to my senior that we recommend impairment accounting on land for CG, but he declined my proposal. After some consideration, I discovered that if the land is impaired and is only worth $10 million, CG is looking at a pre-tax impairment loss of $40 million. That would turn their preliminary earnings estimate of $7 million into a big red number. Thus, if that loss is booked, CG's debt-to-total equity ratio spikes, and one of its loan covenants is triggered. The past few years have been rough, and CG's lenders have expressed serious concerns about earnings and cash flows.

Armed with these data, I admit to myself that the senior may be right about the relative infrequency of land impairment. I also know that the accounting treatment of this situation affects a lot of people. My assignment is to compose a business memo to Mr. Walker to address my concern about the impairment problem. Please help me answer the following questions using FASB Codification (360-10-35: Impairment or Disposal of Long-Lived Assets).

Based on U.S. GAAP, what triggering events or changes in circumstances should be evaluated in testing for the recoverability of long-lived assets? Which of these factors are particularly relevant to the circumstances presented in this case? Based on this information, do you believe that an impairment analysis is required (i.e., that an impairment event has occurred)?

Are the impairment guidelines different for assets held for sale versus assets held for use? Does the fact that land is involved as opposed to another type of long-lived asset alter the situation? Evaluate your answers using specific guidelines from the standards.