In other words, an impaired asset has a current market value that is less than the value listed on the balance sheet. In general, an impaired asset is also a long-term, tangible asset. However, accounts receivable and intangibles can also become impaired.
As a general rule of thumb, according to U. Impairment can occur as a result of overpaying for an asset or group of assets, such as when the value of assets acquired through a merger or acquisition has been overstated by the seller. Impairment also occurs when collection of accounts receivable becomes unlikely.
A record of an asset impairment tells investors, financial institutions and company leadership that an asset is now worth less than expected. For example, a warehouse damaged by a hurricane is impaired through no fault of leadership. But if leadership extended credit without getting repayment terms in writing or in amounts greater than the business could afford to lose and has a dismal accounts receivable turnover ratio , those unrecoverable AR assets fall on leadership.
To make an impairment determination, first calculate an accurate and current fair value for the asset. Next, compare that value to the amount itemized as carrying value or book value on the company balance sheet.
If these amounts are the same, then the asset retains its previous value and no balance sheet adjustment is required. However, the accounting is a bit more complicated when goodwill must also be accounted for on the balance sheet. IFRS Taxonomy. Supporting consistent application. Work plan. Post-implementation Reviews. Pipeline projects.
Open for comment. Better Communication in Financial Reporting. Completed projects. IFRS Foundation news. Meetings and events calendar. IFRS Foundation speeches. IFRS Foundation podcasts. Show Sections. Standard history. Once an asset is deemed to be impaired, its owner is charged with calculating a loss equal to the difference between the net carrying amount and the fair value of the asset. Most businesses impair long-term, tangible assets. This statement addresses the application of goodwill allocation to long-term assets and suggests a preferable method for estimating cash flow probability-weighted and when assets should be held for sale.
Tangible asset impairment might result from regulatory changes, technology changes, significant shifts in consumer preferences or community outlook, a change in the asset's usage rate, or other forecasts of long-term non-profitability. Intangible asset impairment is less clear. Many types of intangible assets are covered in FASB , and more are added by FASB , but the following thresholds do not necessarily hold for intangible assets.
It is often impractical to test every single asset for profitability in every accounting period. Instead, businesses should wait until an event or circumstantial change signals that a particular carrying amount might not be recoverable. Some event-triggering thresholds are easy to define and recognize. For instance, a business should test for impairment when accumulated costs are in excess of amounts originally expected to construct or acquire an asset. In other words, it is more expensive than once thought to obtain a business asset.
Other triggering events are correlative; an asset might be associated with a history of current period losses or operating cash flow losses.
Perhaps the asset shows a pattern of declining market value. There are also triggering events with vague descriptions. Adverse changes in legal factors or general economic conditions are both grounds for testing an impaired asset despite a broad range of possible interpretations for adversity.
Assets must be properly valued fair value in accordance with GAAP prior to testing. Groups of similar assets should be tested together, with the testing set at the lowest level of identifiable cash flows considered independent of other assets. Testing should fairly determine if the carrying amount exceeds undiscounted cash flows related to the use and disposal of the asset. Contact sales. Skip to content Open site navigation sidebar.
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