Impairment Testing in Manufacturing and Construction: Navigating ASC 326 and CECL Requirements

The manufacturing and construction industries operate in environments defined by capital-intensive projects, economic fluctuations, and long-term contractual variability. These challenges make accurate measurement of asset impairments important to maintaining financial transparency and supporting effective decision-making.

Impairment testing, at its core, determines whether the carrying value of an asset exceeds its recoverable amount, ensuring that what is recorded on the books reflects actual economic value. This safeguards the integrity of a company’s financial statements and maintains investor and stakeholder confidence.

With ASC 326, Financial Instruments—Credit Losses, companies are required to adopt the Current Expected Credit Losses (CECL) model, which mandates a forward-looking approach to credit loss recognition. For non-public companies, this guidance became effective for fiscal years beginning after December 15, 2022.

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Why Impairment Testing Matters to Leadership

Impairment testing helps make sure a company’s financial statements show the true worth of its assets. But for executives, it offers much more:

In other words, impairment analysis translates into actionable intelligence for risk management, contract negotiation, and long-term strategic planning.

Evaluating Assets for Impairment

Executives don’t need to be in the weeds of every accounting calculation, but they do need to make sure their teams are evaluating assets with the right level of rigor. Three areas demand attention:

1. Contracts Receivable

Contracts receivable represent amounts billed to customers for goods or services provided. Under ASC 326, companies must record an allowance for credit losses that accounts for:

• Historical loss experience
• Current economic conditions
• Reasonable and supportable forecasts

This ensures receivables are valued based on expected collectability, not just contractual billing.

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2. Contract Assets (Unbilled Revenue)

Under ASC 606 – Revenue Recognition, many companies recognize revenue over time, leading to contract assets. When assessing these balances, businesses should:

• Scrutinize disputed or unsupported amounts, such as unapproved change orders or claims.
• Validate job status with project managers to confirm that percentage-of-completion estimates are accurate.
• Compare gross profit margins across reporting periods to ensure total estimated job costs remain reliable.

These evaluations help mitigate risks tied to premature or inaccurate revenue recognition.

3. Retainage Receivables

Retainage receivables (amounts billed but withheld by customers until project completion or acceptance) also fall under ASC 326’s credit loss framework. As with contracts receivable, companies must recognize allowances for credit losses using historical data, current conditions, and forward-looking forecasts.

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Strategic Benefits of Impairment Testing

While impairment testing is a regulatory requirement, it also functions as a strategic risk management tool. What sets leading companies apart is not whether they meet accounting standards; it’s how they use them.

Regular assessments enhance financial transparency, protect balance sheets from overstatement, and provide early signals of operational or customer-related challenges.

Importantly, effective impairment testing requires collaboration between accounting teams and project managers. By combining financial insights with operational perspectives, organizations can apply sound judgment and ensure estimates reflect both contractual realities and market dynamics.

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Turning Insight Into Action

For manufacturing and construction firms, impairment testing under ASC 326 and CECL is more than an accounting exercise. It is a proactive measure that strengthens resilience and promotes long-term sustainability.

By carefully evaluating contracts receivable, contract assets, and retainage receivables, businesses can ensure their financial statements remain accurate, their risks well-managed, and their stakeholders fully informed.