Challenges in valuing retail store assets: for retailers in search of an accurate measure of fair value for their assets, there is no "one size fits all" approach. Different considerations may well be required. Here are three alternatives to consider.

• Author: Goldstein, Bruce
• Position: ACCOUNTING

One of the challenging things about accounting is that, when posed with a question, several answers can be developed, each with its own merits. Such may be the case for retailers who need to estimate the fair value of their store assets.

While much has been written about applying the fair value principles of ASC 820, Fair Value Measurements and Disclosures, (formerly Financial Accounting Standards Board Statement 157) to financial instruments, different considerations are required when determining retail store valuation and resulting impairment charges that may come with under-performing stores.

Some of the key considerations of ASC 820 can be illustrated this way: Assume a chain of retail apparel stores in malls throughout the United States operated by Retailer X, a well-known branded retailer. Also assume that as is the case for most retailers, each store has its own identifiable cash flows and therefore is the unit of account for determining impairment.

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Assume a store has long-lived assets with a net book value of $700,000 and on the measurement date an impairment indicator exists. Such indicators are noted in ASC 360, Plant, Property and Equipment--Subsequent Measurement, (formerly FASB Statement 144) and may include events such as a negative sales trend, negative or minimal "four wall" cash flows or a new competitor entering the mall.

Under ASC 360-10-35, the reaction to the impairment indicator is to compare the store's undiscounted cash flows to the $700,000 of net book value. Assume the undiscounted cash flows of the store are projected by Retailer X to be $650,000. Thus, the store assets are not recoverable and the assets must be evaluated for impairment. Note that the recover ability shortfall being just $50,000 is not important, as once the assets are determined to be nonrecoverable, the shortfall magnitude is irrelevant.

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If the fair value of the assets is less than $700,000, an impairment charge will be recorded to adjust the assets to their fair value. FASB's goal when it issued Statement 157 was that a valuation framework would be applied by all entities consistently

In other words, if multiple retailers were to go about putting a value on the $700,000 of assets, they would all go about it the same way, even if the assumptions and final estimate of fair value varied across entities. However, as discussed below, it is possible that applying the fair value framework may not always be straightforward.

Estimating Fair...