What exactly is an impaired asset?

An impaired asset has a market value less than the value indicated on the balance sheet. When an asset is impaired, it must be written down to its current market value on the company’s balance sheet.

How Damaged Assets Work

If an asset’s estimated future cash flows are less than its current carrying value, it is considered impaired. An asset may become impaired due to materially adverse changes in legal conditions that have impacted the asset’s worth, significant changes in the asset’s market price due to a change in consumer demand, or physical damage to the asset. Another sign of potential impairment is when an asset is more likely than not to be disposed of before its initial predicted disposal date. Accounts receivable, goodwill, and fixed assets are asset accounts liable to become impaired.

Long-term assets, such as intangibles and fixed assets, are especially vulnerable to impairment since their carrying value depreciates over time.

The company periodically assesses assets for impairment to ensure that it does not inflate the overall asset value on the balance sheet. Generally accepted accounting standards (GAAP) require companies to test certain assets, such as goodwill, on an annual basis. Corporations should evaluate events and economic situations that occur between annual impairment tests, according to GAAP, to determine whether the market value of an asset has fallen below its carrying value and whether it is “more likely than not.”

You should record an impairment loss only if the expected future cash flows are unrecoverable. The company records the loss on its income statement in the same accounting period when it reduces the carrying value of an impaired asset to market value.

Accounting for Depreciated Assets

GAAP defines impairment cash value as the difference between the asset’s carrying value and fair market value. Under IFRS, an impairment’s monetary value is the difference between the asset’s carrying value and its recoverable value. Value in use or fair market value if sold today, is recovered. The item’s potential worth during its useful life determines its value in use.

Debit a loss or spending account and credit the asset to record an impairment. You might use a counter-asset impairment account to credit the connected asset account and keep the historical cost of the asset distinct.
This asset’s net, accumulated depreciation, and counter-asset impairment account reflect its revised carrying value.

The corporation lowers the asset’s carrying value when impairment is recorded. Later periods will report the asset at its decreased carrying value. GAAP requires recording the impaired asset at the lower adjusted dollar amount even if its market value recovers. Conservative accounting principles support this. Selling the asset realizes any gain. IFRS allows impairment loss reversal in certain situations.

Standard GAAP requires companies to assess fixed assets for impairment at the lowest level where cash flows differ from other assets and liabilities. The automaker should examine each machine in a manufacturing plant for impairment rather than the entire high-level plant. If there are no independently identifiable cash flows at this low level, we allow an impairment assessment of the asset group or organization. We spread the impairment adjustment among all assets in a group. This proportion is determined by the current carrying value of the assets.

IFRS accounts for fixed asset impairments at the asset level. If impracticable, cash-generating units (CGUs) can suffer. CGU cash flows are the least noticeable, as they are usually independent of other assets or asset groups.

Impaired Asset vs. Asset Depreciation

We regularly depreciate a capital asset for everyday wear and tear over time. Each accounting period calculates depreciation according to a predetermined schedule using either a straight line or one of several accelerated depreciation methods. Depreciation differs from impairment, which occurs when an asset’s market value is reduced unexpectedly or as a one-time event.

When a capital asset is damaged, it changes the periodic amount of depreciation. You do not need to make retroactive modifications to amend previously taken depreciation. On the other hand, we adjust depreciation charges for the remaining useful life of the asset based on the new carrying value of the impaired asset as of the date of impairment.

Impaired Assets in the Real World

In 2015, Microsoft recorded impairment losses on goodwill and other intangible assets related to its 2013 acquisition of Nokia. Microsoft initially recognized $5.5 billion in goodwill tied to the Nokia acquisition and recognized another $4.5 billion in other intangible assets.

When comparing them to the genuine market value, we discovered that the book value of goodwill from the Nokia acquisition and the assets reported on Microsoft’s balance sheet were inflated.
The company recorded a $7.6 billion impairment loss, including a total of $5.5 billion in goodwill, because Microsoft could not capitalize on the anticipated benefits in the cellular industry.

How Do You Determine Asset Impairment Under GAAP?

To determine an asset’s impairment, remove its carrying value (historical cost minus accumulated depreciation) from its fair market value. If its fair market value is less than its carrying value, you must record an impairment loss to account for the difference.

Where Can I Find Impairment on My Company’s Financial Statements?

On the income statement, an impairment loss appears as a negative value. If you keep a counter-asset account for the value of the impairment to preserve the asset’s historical cost, it will be reported right beneath the asset on your balance sheet. A contra-asset account has a natural balance that is the inverse of a credit in a regular asset account.

When Should a Property Be Impaired?

If an asset’s fair market value is less than its carrying value (historical cost minus accumulated depreciation), we should consider it impaired.
. This could happen due to physical damage to the item, a shift in customer demand, or legal changes around the asset.

Conclusion

If a corporation has an asset that is currently worth less than the value stated on the balance sheet, the corporation considers the asset impaired. The corporation will use an inflationary accounting procedure to write down the value of the asset on the balance sheet. The company’s income statement also reflects the decline in value. GAAP and IFRS have different impairment standards. Depreciation is not the same as impairment, and when an asset becomes impaired, it must modify the depreciation on that asset as well.

• To avoid balance sheet overstatement, assets should be evaluated for impairment regularly.
• Accounts receivable and long-term assets, such as intangibles and fixed assets, are the most likely to become impaired.
• When the value of an impaired asset is written down on the balance sheet, a loss is likewise recognized on the income statement.
• Impairment standards differ between GAAP and IFRS.