Pop!

by Heather Phillips, CPA | Manager, Not-for-Profit Services Group

When the real estate bubble burst after decades of inflation, many home-owners saw their property decline in value. Some decided to ‘stay the course’ hoping to see prices start to go back up, while others had to sell – sometimes suffering a hefty loss. The commercial real estate market has experienced similar trends. According to the real estate website Trulia, the housing market is 32% back to ‘normal’ through July 2012 (‘normal’ being ‘the rough estimate of the long-term pre-bubble average’).

Depending on the type of not-for-profit you are, your organization may own property – whether residential or commercial – for program, operating, or investment purposes. An important accounting consideration with today’s real estate market is impairment. Ultimately, it is management’s responsibility to consider whether any assets or properties owned are impaired. But, auditors are also focused on this risk in light of the current market.

An asset is considered impaired when it is determined that its carrying value (its cost less accumulated depreciation, or its net book value) will not be fully recovered. ASC 360-10-35-21 provides examples of circumstances that indicate that the carrying value of an asset may not be recoverable:

a) A significant decrease in the market price of an asset

b) A significant adverse change in the extent or manner in which an asset is being used or in its physical condition

c) A significant adverse change in legal factors or in the business climate that could affect the value of an asset, including an adverse action or assessment by a regulator

d) An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of an asset

e) A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of an asset

f) A current expectation that, more likely than not (more than 50% likelihood), an asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

If you suspect that the carrying value of your assets may not be recoverable, you may need to recognize an impairment loss. To determine if you need to recognize an impairment loss, you should determine the cash flows expected to result from the use and eventual disposition of an asset. If the sum of these undiscounted cash flows is less than the carrying value of the asset, then an impairment loss should be recognized. The amount of the loss, however, is not the difference between the cash flows and the carrying value. Rather, the impairment loss is measured as the amount by which the carrying value of the asset exceeds its fair value. Generally, an impairment loss is shown ‘above-the-line’ in figuring an organization’s change in net assets.

As real estate prices start to stabilize, impairment should become less of a risk. However, the risk never completely goes away. Evaluating assets for impairment should be part of every organization’s annual closing process. By checking for this before the audit, you’ll hopefully avoid surprising audit adjustments that could have a very negative impact on year-end numbers – something that would definitely cause any controller’s balloon to ‘POP!’.