Introduction
In the third quarter of 2024, according to its 2024 annual report, Intel concluded that its manufacturing assets, mainly those for its Intel 7 process node, exceeded the capacity it would need. After assessing which equipment could be reused elsewhere, it recorded $2.3 billion of non-cash impairments, mostly on construction in progress, and $992 million of accelerated depreciation on equipment still in use, nearly all in cost of sales. Together, the charges were the main reason Intel's gross margin fell by $4.4 billion that year. None of them used cash; they recognized that the factories would not earn back what they had cost.
That conclusion is what Accounting Standards Codification (ASC) Topic 360 asks of every company with property, plant and equipment or finite-lived intangible assets. Unlike goodwill, these assets are not tested every year; they are tested when something suggests their carrying amount, their balance sheet value, may not be recoverable. The test has two steps, a screen and a measurement, and its outcome determines both the size of the write-down and the depreciation that follows. How an impairment moves the three statements is traced in impairments and write-downs on the three statements.
When to Test: Impairment Indicators
ASC 360 requires a test only when events or changes in circumstances indicate that an asset's carrying amount may not be recoverable. Deloitte's guide on when to test long-lived assets lists the standard's examples, which include:
- A significant decrease in market price of the asset.
- A significant adverse change in the extent or manner in which the asset is used, or in its physical condition.
- An adverse change in legal factors or the business climate, including action by a regulator.
- Costs significantly above expectations to acquire or build the asset.
- Current operating or cash flow losses combined with a history or forecast of continuing losses.
- A current expectation, more likely than not, that the asset will be sold or disposed of well before the end of its previously estimated useful life.
- Impairment indicator
An event or change in circumstances suggesting that the carrying amount of a long-lived asset or asset group may not be recoverable, such as a sharp fall in market value, an adverse change in use or condition, or continuing losses. Under ASC 360, an indicator triggers the recoverability test.
Intel's trigger fits the second and last items: projected demand meant some of its Intel 7 equipment would not be used as planned. Store closures, plant consolidations, technological obsolescence and sustained losses at a business unit are the most common triggers in practice.
The Asset Group
Most long-lived assets do not generate cash flows on their own. A machine contributes to a factory's output; a store's fixtures contribute to its sales. ASC 360 therefore tests assets in an asset group, the lowest level at which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For a retailer, that is usually an individual store; for a manufacturer, a plant or a production line; for a pipeline company, perhaps an entire system.
- Asset group
The lowest level at which a company's long-lived assets generate identifiable cash flows largely independent of those of other assets and liabilities. Under ASC 360, recoverability is tested and impairment losses are measured for the asset group rather than for individual assets.
The choice of grouping matters. A narrow group, such as a single store, makes impairment more likely, because a weak store cannot be supported by strong ones; a broad group can hide a weak component inside a profitable whole.
The Two-Step Test
Step one is a recoverability screen. The company compares the asset group's carrying amount with the undiscounted cash flows it expects the group to generate from its use and eventual disposal. If the undiscounted cash flows are higher, the group is recoverable and no impairment is recorded, even if its fair value is below its carrying amount. Step two applies only if the group fails the screen: the impairment loss is the excess of the carrying amount over the group's fair value.
Two asset groups with the same carrying amount and fair value show why the screen matters:
| Line item | Group A | Group B |
|---|---|---|
| Carrying amount | 1,000 | 1,000 |
| Undiscounted future cash flows | 1,100 | 900 |
| Step one: recoverable? | Yes | No |
| Fair value, discounted | 600 | 600 |
| Impairment loss recognized | 0 | 400 |
Group A passes the undiscounted screen, so no loss is recorded although its fair value is 400 below carrying amount. Group B fails, so it is written down to fair value.
Group A keeps its $1,000 carrying amount despite being worth only $600, because its undiscounted cash flows cover the carrying amount. Group B, with lower expected cash flows, crosses the threshold and is written down by the full $400 gap to fair value. The undiscounted screen makes US GAAP impairments less frequent than a pure fair value test would, but larger when they occur, because once the screen is failed the loss is measured all the way to fair value.
Estimating the Cash Flows and Fair Value
The two steps use different inputs. The undiscounted cash flows in step one are the company's own expectations: what it plans to do with the asset group, over the remaining life of its primary asset, including any proceeds from eventual disposal, and excluding interest. Because they reflect the company's plans, a decision to keep running a weak plant rather than close it can keep the group above the threshold. The fair value in step two is different: it is the price a market participant would pay for the group, often estimated by discounting cash flows at a market rate or by reference to prices for similar assets. A company can therefore pass step one on its own assumptions while a buyer would value the assets well below their carrying amount, which is one reason write-downs often coincide with decisions to sell or close.
Allocating the Loss
The loss is allocated to the long-lived assets in the group in proportion to their carrying amounts, but no individual asset is reduced below its own fair value if that can be determined. Working capital in the group, such as inventory and receivables, is tested under its own rules first. Goodwill is left out of the group unless the group is or includes a whole reporting unit, never absorbs any of the loss, and is tested afterwards under ASC 350, covered in goodwill and goodwill impairment.
After the Write-Down
The written-down amount becomes the asset's new cost basis. Depreciation over its remaining life is based on that lower amount, so future depreciation falls and future operating margins rise, even though nothing about the business has improved. Under US GAAP, an impairment loss on assets held and used is never reversed, even if conditions recover.
The tax basis of the asset does not follow the book write-down. US Treasury regulations on loss deductions allow a loss only when it is fixed by a closed and completed transaction, so an impairment of an asset still in use is generally deducted only when the asset is sold or abandoned. Until then, tax depreciation continues on the original cost, the gap between the two bases sits in deferred tax, and the charge saves no cash tax when booked.
Impairment or Accelerated Depreciation?
Intel's charges show the two ways a company can recognize that assets will not earn back their cost. Assets that fail the impairment test are written down at once. Assets that will be used for a shorter period than planned, but are not impaired, have their remaining lives shortened, so their remaining book value is depreciated faster over the months before retirement. Both reduce earnings and neither uses cash, but they appear differently: an impairment is a single charge, while accelerated depreciation raises depreciation over the remaining period, and companies typically disclose both in their restructuring discussion. The life estimate itself is covered in useful lives and salvage values.
Assets that management has committed to sell follow a different model: once classified as held for sale, they are measured at the lower of carrying amount and fair value less costs to sell, depreciation stops, and later increases in fair value can be recognized up to the cumulative loss previously recorded.
What Bankers Read in an Impairment
Bankers treat long-lived asset impairments as non-recurring, excluding them from earnings before interest, taxes, depreciation and amortization (EBITDA) and adjusted earnings, as discussed in one-time items. But the information in the charge is not one-off. An impairment says that the company invested more in an asset group than it now expects to recover, and the note explaining it identifies which business, which assets and which assumptions changed.
Two follow-up questions matter most. First, does the impairment change the outlook for the rest of the business? Intel's charge reflected excess capacity at one process node, but it also raised questions about the return on the much larger investments then under way. Second, how will the lower asset base affect future results? Lower depreciation will lift future margins, so bankers forecasting earnings after a large impairment should separate that mechanical improvement from any genuine recovery.
