Volume 4, No. 11

 

SFAS No. 121: Corporate:  Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" sounds like a mouthful. When adopted by U.S. companies, however, it will slim down balance sheets by requiring managements to eliminate flabby recorded values for assets that no longer pull their weight. This standard marks the first time a U.S. standard setter has defined what constitutes an asset impairment, and sets a methodology for recognizing such an impairment. Firms will now have to evaluate the cost recoverability of long-lived assets more routinely than in the past, and accordingly, adjust recorded values downward when an impairment has occurred. The effects of the standard will not be the same for all industries; companies in some industries will be likely to start writing down assets in the first quarter of 1996. If conscientiously applied, it will result in balance sheets that are more representative of economic reality - but will also recalibrate the yardsticks of performance such as return on equity.

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