Remeasurement

What Is Remeasurement?

Remeasurement is the re-evaluation of the value of a long-term asset or foreign currency on a company's financial statements.

Understanding Remeasurement

Remeasurement is the process of re-establishing the value of an item or asset to provide a more accurate financial record of its value. Companies use remeasurement when translating the value of revenues and assets from a foreign subsidiary that is denominated in another currency. Remeasurement is also important because it can help companies revalue fixed assets (physical, long-term assets) as well as intangible assets, such as goodwill.

Types of Remeasurement

Remeasurement Due to Foreign Currency Translation

Remeasurement is common when companies have a foreign subsidiary. If the functional currency of the subsidiary is not equal to the local currency of the subsidiary, the parent company must use remeasurement to evaluate the effect of foreign currency translation on the parent company.

It is also used in cases where the subsidiary is operating in an environment where there is hyperinflation or large and frequent swings in the currency exchange rate. Hyperinflation is when a country is experiencing rapid and excessive increases in the prices of goods. Remeasurement, in this context, is also known as the temporal method, which uses historical exchange rates based on when the assets were acquired.

Foreign currency remeasurement would come into play for a company that has a subsidiary in the United Kingdom, for example, where the local currency is the British pound. However, the company sells to Europe and is paid in euros, which would be the functional currency. The parent company would eventually need to convert the financial statements back to the parent company's local currency.

Gains or losses from foreign currency translation are recorded in "other comprehensive income." Accumulated other comprehensive income includes unrealized gains and losses from various sources that do not affect net income on the income statement directly. These gains and losses are instead reported separately, below retained earnings, in the equity section of the balance sheet.

Remeasurement Due to Impairment

Remeasurement is employed during a situation when the value of a physical, long-term asset, such as land, has drastically decreased and cannot be recovered. A company holds the value of the land it owns on the balance sheet at historical cost — the price originally paid to acquire the land. Generally accepted accounting principles (GAAP) require the use of historical cost when reporting fixed asset value because the amount is easily verifiable and typically conservative, as property tends to appreciate in value over time. Therefore, an appreciation in value may not be remeasured to a higher value on the balance sheet.

However, if the value of the land decreases significantly and permanently, a remeasurement may be appropriate. Remeasuring the asset allows the company to more accurately record the value of the impaired asset and may allow a deductible loss to be taken. In order to determine whether an impairment exists, a company needs to determine if the market value of an asset has dropped below its carrying value.

An impairment loss should only be recorded if the anticipated future cash flows are unrecoverable. Therefore, in the case of land impairment, a company would typically need to anticipate a sale in the near future in order to record a remeasurement to the lower value. If its sale is not imminent, the value of the land could reasonably be expected to recover over time. When an impaired asset’s carrying value is written down to market value, the loss is recognized on the company’s income statement in the same accounting period.

Example of Remeasurement

In the wake of the COVID-19 outbreak, the U.S. economy suffered major disruptions and certain accounting issues arose as a result. One of these issues arose around the identification and valuation of goodwill impairment. Goodwill is typically analyzed and tested for impairment on an annual basis. However, if a "triggering event" occurs, such as the drastic downturn in the economy as a result of the COVID-19 outbreak, companies are urged to test their goodwill for impairment outside of the annual basis. An additional and immediate review may be necessary in order to remeasure the value of the goodwill accurately.

When testing for goodwill impairment, a company can chose from one of two methods. The income approach uses discounted future cash flows to identify the value of goodwill. The market approach utilizes fair market valuations to determine the value of goodwill based on similar transactions within the same sector or industry. Both of these remeasurement methods are made more difficult in the wake of the COVID-19 pandemic.

The income approach to remeasuring goodwill is complicated by difficulties surrounding the projection of future cash flows. With an uncertain future, as well as increasing government involvement in business relief, it is more difficult for companies to accurately project their cash flows. Additionally, there are more immediate issues affecting a company's ability to project future cash flows due to business closures, curtailed operations, uncertain employee sick leave, and decreased productivity due to work-from-home arrangements. The market approach is similarly muddled because accurate market analysis and comparable transaction selection is problematic as well.