Download US GAAP: Issues and Solutions for the Pharmaceuticals and Life Sciences Industries

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Capitalization and impairment
14.Impairment testing and useful life
Background
Relevant guidance
Company A has a major production line that produces its
blockbuster antidepressant. The production line has no
alternative use. A competitor launches a new antidepressant
with better efficacy. Company A expects sales of its drug to
drop rapidly and significantly. Although positive margins
are forecasted to continue, Company A identifies this as an
indicator of impairment. As a result of the new competition,
Company A may exit the market for this drug earlier than
previously contemplated.
A long-lived asset (asset group) shall be tested for recoverability
whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable [ASC 360–10–35–21].
An impairment loss shall be recognized only if the carrying
amount of a long-lived asset (asset group) is not recoverable
and exceeds its fair value. The carrying amount of a long-lived
asset (asset group) is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and
eventual disposition of the asset (asset group)… An impairment
loss shall be measured as the amount by which the carrying
amount of a long-lived asset (asset group) exceeds its fair value
[ASC 360–10–35–17].
When a long-lived asset (asset group) is tested for recoverability,
it also may be necessary to review depreciation estimates and
method… or the amortization period… Any revision to the
remaining useful life of a long-lived asset resulting from that
review also shall be considered in developing estimates of future
cash flows used to test the asset (asset group) for recoverability…
[ASC 360–10–35–22].
How should Company A assess the
impairment and useful lives of
long-lived assets where impairment
indicators have been identified? 
If an impairment loss is recognized, the adjusted carrying
amount of a long-lived asset shall be its new cost basis. For
a depreciable long-lived asset, the new cost basis shall be
depreciated (amortized) over the remaining useful life of that
asset. Restoration of a previously recognized impairment loss is
prohibited [ASC 360–10–35–20].
Solution
Assuming that the antidepressant asset group represents the lowest level of identifiable cash flows, Company A should evaluate
the carrying amount of the antidepressant’s asset group (including the production line) relative to its future undiscounted cash
flows. An impairment loss should be recognized if the carrying amount of the antidepressant’s asset group exceeds the future
undiscounted cash flows. The resulting impairment would be based on the difference between the carrying amount of the unit and
its fair value.
In addition, Company A should revise the estimated useful life of the affected assets remaining after the impairment analysis is
performed based on the estimated period it expects to obtain economic benefit from the assets. After recognizing the impairment
and revising the estimated useful life for the affected assets, Company A would continue to amortize the remainder of the asset over
its expected useful life.
PwC
15
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