You are a green-as-grass staff auditor for FBG LLP, a small CPA firm in San Antonio, TX. Your biggest client is CG Corporation, a publicly traded, regional land development company. One of CGs prime holdings is a sizable tract in the northeast part of town, where most of the citys growth has occurred during the past decade. As 2013 draws to a close, CGs CEO, Mark Kedman, is in negotiations with a group of buyers who are interested in establishing 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. The land is carried on CGs books at $50 million, but CG believes that it will be able to sell the land to the development group for $80 million. At that value, this particular piece of property comprises roughly 10% of CGs overall land holdings. While working on the 2013 year-end audit in early January of 2014, you hear a couple of people at CG having a water cooler conversation about spiders. When you mention that you hate spiders, the following conversation ensues: Employee: I bet you dont hate them as much as Kedman does. You: Why? Is Kedman allergic to spiders or something? Employee: I guess you could say that (laughing) You: I dont get it. Employee: A couple of surveyors were poking around on the northeast San Antonio site last week and found spiders on the property. You: And? Employee: Fish and Wildlife says theyve not seen this particular species in 50 years. You: So? Employee: Do you not read the paper? San Antonio has a long history of being held hostage by rare spiders. You: I see... Intrigued, you return to your cubicle, put on your headphones to drown out the fluorescent bulb that is buzzing and flickering over your head, and run a quick Internet search for San Antonio rare spiders. The first few articles that pop up are from San Antonios major newspaper, the Express-News. One piece from October 2, 2012 describes a $15.1 million highway underpass project that was put on hold indefinitely when a Bracken Bat Cave meshweaver spider (yes, singular) was found in the excavation area. Another from February 25, 2013 notes that with only 1500 feet to go, a six-mile, $11 million water pipeline project had to be halted because the same type of spider was found in a recently exposed underground cave. The second article also states that even if the construction companies are granted approval from federal authorities to find solutions and build in areas such as these, securing a permit can take up to two years. Who would have thought that a spider could wreak such havoc? After reading the articles carefully and thinking about things a bit, you approach the senior on the engagement and ask him what he thinks. As it turns out, the senior has already heard about the spider issue. Kedman called the lead partner that morning and told her that the retirement community deal was off. When Kedman told the potential buyers about the spiders, they told him that they would re-evaluate things over the weekend and get back with him. On Mondays conference call, the buyers told Kedman that their valuation team had reduced their appraisal of the property to $10 million, based on its potential as an eco-friendly hill country golf club. The buyers are convinced that they can work around the spider issue by minimizing excavation and strategically placing greens and fairways on the golf course such that the spider areas would remain unmolested. Kedman declined, indicating that he would just wait for the right buyer. When the senior finishes his story, you have the following conversation: You: So do you think the land is still worth $80 million? Or even $50 million? Senior: Right now? Probably not. Why? You: Well, dont you think we should consider recommending impairment? Senior: Impairment? On land? You: Does FAS 144 not apply to land? Senior: Very funny. Look, nobody impairs land. Land has an infinite life. You: I realize that, but these guys just had a $10 million offer on property they were on the verge of selling for $80 million because the buyers know that you cant really build on it. I mean, you cant dig. Period. If you cant dig, you cant build houses. If you cant build houses, you cant sell houses. And if you cant sell houses and charge outrageous community fees and all that, the potential revenue stream is seriously compromised. Thats why the new appraisal is so much lower. Basically, CG is now holding a big chunk of land that has to be converted into a nature preserve or maybe just maybe a golf course. I think this probably is the best offer theyre going to get. Senior: Relax, will you? You cant build houses on the land right now. At some point those spiders will be gone and everything will be fine. Impairing land wow [walks away] Being annoyed rather than satisfied, you head back to your cube, open a spreadsheet, and look at some numbers. What you find is both interesting and discouraging. First, if the land really is impaired and if its really only worth $10 million, CG obviously 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. Collateral damage here would include the employee bonus plan, which covers all non-salaried workers. It has been a while since the employees have gotten much in the way of bonuses and they are hoping for a good year. Second, if that loss is booked, CGs debt-to-total-equity ratio spikes and one of their loan covenants is triggered. Before the housing market collapse that started in 2007-2008 this wouldnt have been that big of a deal, but the past few years have been rough and CGs lenders have expressed serious concerns about both earnings and cash flows. Armed with these data, you meekly approach the senior and present your findings. His response? Well, thats even more evidence that you should leave this alone, now isnt it? Like I said before, nobody impairs land. Besides, that particular investor group is just one vote where valuation is concerned. I heard that an independent appraiser valued the land at $60 million and the client believes they should at least be able to recover the carrying value. Their analysis suggests that no impairment has occurred. I know that youre fresh out of school and are wearing your conquer-the-world hat and all, but seriously this is real life. Think of all the people who are affected here. If the spider problem goes away and they can unload the land for closer to $50 million, everybody wins. With your doomsday scenario, everybody loses. Having finished enlightening you, the senior dismisses you from his presence. As you head back down the hall, you admit to yourself that the senior may be right about the relative infrequency of land impairment. You also know that the accounting treatment of this situation affects a lot of people. With various ideas buzzing around in your head impairments, land, virtues, consequences, stakeholders, ethical decision-making you briefly ponder a career as a small-town librarian. Welcome to public accounting.

1. 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.c., that an impairment event has occurred)?

2. Arc 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.

3. What guidance is provided in the authoritative literature regarding how to handle uncertainty related to the fair value of a long-lived asset? Based upon this guidance, and assuming an impairment event has occurred, determine whether an impairment loss should be recognized. Show your calculations.