SFAS No. 144Accounting for theImpairment or Disposal ofLong-Lived Assets (“LLA’s”)

Babush, Neiman, Kornman & Johnson, LLPwww.bnkj.com

Jeffrey G. Olson, CPA

Outline IntroductionIntroduction Assets to be held and used

Impairment write-down

Assets to be disposed of by sale Valuation reserves (FV - cost to sell) Presentation

Assets to be disposed other than by sale Abandonment Exchange Distribution to owners (spin-out)

Overview

SFAS 144 Summary

Asset type Accounting issues Triggering event New Cost Basis

1. Held and used Impairment write down Subjective (para 8 examples), Yes but result is quantitative

2. Disposal by sale Valuation reserves/restoration Para 30 crititeria met No-reserves can be restoredContinued/discontinued operations

3. Disposal other than sale Treated as "held and used" Still subect to impairment Yes until disposed test as "held and used"

FAS 144 Supersedes Other GAAP Pronouncements

FAS 121FAS 121But retains its impairment recognition and

measurement principals

APB 30 (disposal of a segment of a APB 30 (disposal of a segment of a business)business)But retains its discontinued operations

presentation requirementsExtends requirements to dispositions

“other than by sale”

Effective Date FYE After 12/15/01

Not applicable toNot applicable to Goodwill and other non-amortizable

intangibles Financial services intangibles – core

deposits, servicing rights, DAC Equity investments Deferred taxes Unproved oil & gas properties Various other industry specific items

Group Concept LLA may be part of or in a group with other LLA may be part of or in a group with other

assets and liabilitiesassets and liabilitiesGroup is lowest level for which there are identifiable,

independent cash flows - LLA itself may not have discrete cash flows

Group becomes the measurement unit for FAS 144 (carrying values, cash flows, fair value)

Does not change GAAP for those other assets and liabilities

• They are first measured under GAAP before applying FAS 144 to the group (valuation reserves, LCM write downs, etc.)

Group Concept Terminology

““Asset Group”Asset Group”LLA’s to be held and used

““Disposal Group”Disposal Group”LLA’s to be disposed (by sale or

otherwise)• In a single transaction• Group includes liabilities to be

transferred

Outline

Introduction Assets to be Assets to be held and usedheld and used

Impairment write downImpairment write down

Assets to be disposed of by sale Assets to be disposed other than

by sale

LLA’s to be Held and Used Impairment exists whenImpairment exists when

An asset’s (or a group’s) carrying value exceeds its fair value

Recognized only ifRecognized only if Carrying value is not recoverable from the sum of the future

undiscounted cash flows to be derived from the asset (or group) from both

• Operations• Future disposition

When to test? (paragraph 8 of handout)When to test? (paragraph 8 of handout)

Example 1 in Appendix A - Handout

Measurement at group levelMeasurement at group level Allocation of impairment lossAllocation of impairment loss

Only to LLA’s on pro-rata basis Can limit allocation to FV of one or more LLA’s if

FV higher than the resulting CV under pro-rata allocation of impairment loss

Establishes new cost basisEstablishes new cost basis Write-downs are not restored if value

subsequently increases or if CV becomes recoverable

Lowers future depreciation charges

Future Cash Flows Directly relatedDirectly related

Arise from use and sale of assets (or group)

Exclude interestExclude interest Un-leveraged asset cash flows

Entities own assumptionsEntities own assumptions Considering all available information

Can use probability weighted CF’sCan use probability weighted CF’s

Future Cash Flows - Continued

Remaining useful lifeRemaining useful life Of asset or of primary asset in group

Based on existing service potentialBased on existing service potential Cash flows for necessary maintenance included Cash flows that are for improving service potential are

excluded

Assets in developmentAssets in development Service potential when complete Include interest to be capitalized as a cash flow

Goodwill Inclusion

Generally not applicable to real Generally not applicable to real estate - no goodwillestate - no goodwill

Carrying value of goodwill assetsCarrying value of goodwill assetsUsed in impairment test only when

asset group is or includes a reporting unit (as defined in FAS 142)

Lower level group with only part Lower level group with only part of a reporting unitof a reporting unitWill exclude goodwill carrying value in

impairment test

Reporting & Disclosure Loss is part of continuing operationsLoss is part of continuing operations

Included in “income from operations” subtotal

In the FS NotesIn the FS NotesDescription of assets and impairmentAmount of loss, if not on face of the FSFair value method used - market

quote/DCF/appraisal/etc... If FAS 131 (business segment), then identify

segment to which loss pertains

Outline

Introduction Assets to be held and used Assets to be Assets to be disposed of by saledisposed of by sale

Valuation reserves (FV- cost to sell) Valuation reserves (FV- cost to sell) PresentationPresentation

Assets to be disposed other than by sale

Recognition Identified as held for sale (in FS or notes) during period Identified as held for sale (in FS or notes) during period

in which first meet para 30 criteria - Handoutin which first meet para 30 criteria - Handout General one year sale requirement, some exceptions Others

Failure to continue to meet criteriaFailure to continue to meet criteria Reclassify as “held and used”

Newly acquired LLANewly acquired LLA Held for sale if one year criteria met at acquisition and Others criteria are likely to be met “within a short period”

Measurement Lower ofLower of

Cost, or Fair value less cost to sell

Not a new cost basisNot a new cost basis Subsequent increases in value, net of

disposal costs, can be booked up to previous losses recorded

OtherOther No depreciation while held for sale Future operating losses are recorded as

incurred, not part of valuation write down

Presentation If a “component” of an entityIf a “component” of an entity

Then report current and prior periods as discontinued operations, net of income taxes if both:

• Related cash flows and operations will be eliminated as a result of the sale, and

• No significant continuing involvement after the sale

If not a “component”If not a “component”Then continue to report as continuing operations

Related assets and liabilitiesRelated assets and liabilitiesSeparately identified on the balance sheet

Presentation - What is a Component

Component – operations Component – operations and CFs clearly and CFs clearly distinguisheddistinguishedReporting or operating segmentReporting unitSubsidiaryAsset group

Disclosure in FS Notes Description of assets & Description of assets &

circumstances leading to expected circumstances leading to expected disposaldisposal

Gain or loss recognized, if not on Gain or loss recognized, if not on face of the FSface of the FS

Revenue & pre-tax profit (loss) in Revenue & pre-tax profit (loss) in discontinued operation, if applicablediscontinued operation, if applicable

FAS 131 segment information, if FAS 131 segment information, if applicableapplicable

Change In Sale Plan Measurement – subsequent decision not to Measurement – subsequent decision not to

sell after “Held for Sale” treatment has been sell after “Held for Sale” treatment has been applied, thenapplied, thenReclassify on BS as held and used

• Measure at the lower of– original cost less all depreciation that would have been allowed, or– Fair value on the date subsequently determined not for sale

• Any gain or loss is part of continuing operationsPrior operations, previously presented as discontinued

operations will, be reclassified as continuing

Outline

Introduction Assets to be held and used Assets to be disposed of by sale Assets to be disposed other than by saleAssets to be disposed other than by sale

Other Than Sale Disposals

Abandonment, exchange, Abandonment, exchange, or distribution to owners or distribution to owners (spin-out)(spin-out)Continue to be classified and

accounted for as “held and used” until disposed, subject to impairment testing

Abandonment

DisposedDisposedWhen it is no longer being used

If committed to a “plan” of If committed to a “plan” of disposaldisposalShorten useful life for depreciation

Temporarily idle is not Temporarily idle is not abandonedabandoned

Exchanged or Distributed DisposedDisposed

When exchange or disposition takes place

If tested for “held and used” impairmentIf tested for “held and used” impairmentThen use cash flows for remaining useful life to

test for recoverability Ignore anticipated disposition

If a “component,” then presented as If a “component,” then presented as discontinued operations (current & prior discontinued operations (current & prior periods) at disposal dateperiods) at disposal date

Withholding Requirements for Foreign Partners in US Real Property Partnerships

Babush, Neiman, Kornman & Johnson, LLPwww.bnkj.com

William S. Johnson, CPAHunter M. Showalter

Summary of Code Section Section 1441-withholding on Section 1441-withholding on

nonresident aliens-flat taxnonresident aliens-flat tax Section 1442-withholding on Section 1442-withholding on

foreign corporations-flat taxforeign corporations-flat tax Section 1443-withholding on Section 1443-withholding on

foreign tax-exempt organizationsforeign tax-exempt organizations Section 1444-Withholding on Section 1444-Withholding on

Virgin Island incomeVirgin Island income

Summary of Code Section Section 1445 - withholding Section 1445 - withholding

on dispositions of US real on dispositions of US real property interests property interests (FIRPTA)-Form 8288(FIRPTA)-Form 8288

Section 1446- withholding Section 1446- withholding on foreign partners in US on foreign partners in US partnerships - Forms partnerships - Forms 8804, 8805 and 88138804, 8805 and 8813

Taxation of Transfers of US Real Property Interests

Foreign Investment in US Real Foreign Investment in US Real Property Tax Act of 1980 (FIRPTA)Property Tax Act of 1980 (FIRPTA)

FIRPTA treats gains and losses FIRPTA treats gains and losses from dispositions of US real from dispositions of US real property interests as effectively property interests as effectively connected with the conduct of a US connected with the conduct of a US trade or businesstrade or business

Purchaser of US real property Purchaser of US real property interest is generally required to interest is generally required to withhold 10% of the purchase pricewithhold 10% of the purchase price

Taxation of Transfers of US Real Property Interests Tax due in 20 days of Tax due in 20 days of

transfertransfer Exceptions to Exceptions to

withholding withholding requirementsrequirementsNon foreign affidavitFIRPTA withholding

certificate -If filed by day of transfer, tax must be withheld but does not need to be paid to IRS until 20 days after IRS determination

Taxation of Repatriated Earnings Interest & dividends paid by US Interest & dividends paid by US

corporations to foreign corporations to foreign shareholders are generally shareholders are generally subject to a 30% withholding tax. subject to a 30% withholding tax. The withholding rate may be The withholding rate may be lowered due to tax treaty.lowered due to tax treaty.

Foreign corporations that are Foreign corporations that are engaged in business in the US engaged in business in the US are subject to a 30% branch are subject to a 30% branch profits tax on earnings not profits tax on earnings not reinvested in active US business reinvested in active US business assets. Treaties may lower the assets. Treaties may lower the rate or even eliminate the tax. rate or even eliminate the tax.

Taxation of Operating Income US source income that is not US source income that is not

effectively connected with the effectively connected with the conduct of a US trade or conduct of a US trade or businessbusiness30% withholding tax on gross US

source incomeNo deductionsNo treaty reduction in rate

Taxation of Operating Income US source income that is US source income that is

effectively connected effectively connected with the conduct of a US with the conduct of a US trade or businesstrade or businessTaxation at regular rates on

net income after deductionsMust file US tax returns

Federal Foreign Tax Withholding

Options for CalculationOptions for CalculationSafe Harbor OptionStandard Option Option 1Option 2

Safe HarborSafe Harbor4 Installments Due 4/15, 6/15, 9/15, 12/15Each quarterly installment is 25% of prior year’s

total withholding due on effectively connected income (ECI) provided that

• Prior year was 12 months• Partnership filed prior year tax return• Prior year ECI was not less than 50% of current year ECI• Current year ECI can’t be twice that of prior year ECI

Federal Foreign Tax Withholding

Standard optionStandard option 4 Installments Due 4/15, 6/15, 4 Installments Due 4/15, 6/15,

9/15, 12/15 9/15, 12/15 1st and 2nd installments based on

annualized ECI using first 3 months of current year

3rd installment based on annualized ECI using first 6 months of current year

4th installment based on annualized ECI using first 9 months of current year

Federal Foreign Tax Withholding

Federal Foreign Tax Withholding

Option 1 & 2Option 1 & 2Must elect to use either option

each year by filing Form 8842Election must be made by 4/15 for

calendar year partnershipsOptions have different

annualization periods than standard option

Federal Foreign Tax Withholding

Example - Standard OptionExample - Standard Option AssumptionsAssumptions

ECI for first 3 months is $106,000ECI for first 6 months is $203,000ECI for first 9 months is $290,000Foreign partner’s income is 60%

of partnership income

1 Annualization periods (see instructions) 1 First 3 Months First 3 Months First 6 Months First 9 Months

2

Enter the partnership’s effectively connected taxable income foreach period 2 106,000.00 106,000.00 203,000.00 290,000.00

3 Annualization amounts (see instructions) 3 4.00 4.00 4.004.00 2.002.00 1.331.33

4Annualized effectively connected taxable income. Multiply line 2 by line 3 4 424,000.00 424,000.00 406,000.00 386,665.70

5Foreign partner’s annualized effectively connected taxable income. Enter the foreign partner’s share of line 4(60%) 5 254,400.00 254,400.00 243,600.00 231,999.42

6 Multiply line 5 by 35% Sec.1446 6 89,040.00 89,040.00 85,260.00 81,199.80

7 Section 6655(e)(2) applicable percentage 7 0.25 0.25 0.500.50 0.750.75 1.001.00

8 Multiply line 6 by line 7 8 22,260.00 44,520.00 63,945.00 81,199.80

9 Add the amounts in all preceding columns of line 10 9   (22,260.00) (44,520.00) (63,645.00)

10Installment payments of section 1446 tax due for foreign partner.Subtract line 9 from line 8. If less than zero, enter -0- 10 22,260.00 22,260.00 19,425.00 17,254.80

Federal Penalties

Late payment of tax when tax is due - 1/2 of 1% for Late payment of tax when tax is due - 1/2 of 1% for each month or part of a month the tax is unpaideach month or part of a month the tax is unpaid

Failure to withhold under section 1446 may be Failure to withhold under section 1446 may be subject to civil penalty equal to amount that subject to civil penalty equal to amount that should have been withheldshould have been withheld

Failure to file 8804 w/IRS & furnish 8805 to correct Failure to file 8804 w/IRS & furnish 8805 to correct recipient can carry maximum penalty of $250,000 recipient can carry maximum penalty of $250,000 AND $100,000 respectivelyAND $100,000 respectively

Georgia Foreign Withholding Withholding is 4% of distribution made to non-Georgia Withholding is 4% of distribution made to non-Georgia

resident (foreign partner), not based on incomeresident (foreign partner), not based on income Georgia is unclear on whether withholding is required for Georgia is unclear on whether withholding is required for

distributions made on income or distributions made on distributions made on income or distributions made on return of capitalreturn of capital

File Form GA-V on 15th day after each month a distribution File Form GA-V on 15th day after each month a distribution is madeis made

File Form G-7 each quarter after distribution(s) are madeFile Form G-7 each quarter after distribution(s) are made File Form G-2AFile Form G-2A annually to foreign partnersannually to foreign partners