Impaired Capital
What Is Impaired Capital?
Impaired capital is a balance sheet condition where a company's total capital turns out to be not exactly the par value of its capital stock.
Not at all like impaired assets, which can never recover their value, impaired capital can be revised once total capital returns to a level higher than the par value of the capital stock.
Impaired Capital Explained
Like the impairment of an asset, which is a permanent reduction in the value of a company's asset, a company's capital can likewise become impaired. Impaired capital influences a company's balance sheet when stockholders' equity is worth not exactly the par value of the stock.
What Causes Impaired Capital?
Impaired capital can be the outcome for a firm that encounters losses and whose retained earnings are negative. These negative earnings are likewise called a retained deficit. Retained earnings are impacted by dividend distributions, so on the off chance that a company gives out too much in dividends this might cause a negative balance in the diminished earnings. Incorporation laws frequently restrict companies from paying dividends before they can dispense with any deficit in retained earnings.
Not at all like the impairment of an asset that never recuperates, impaired capital can normally reverse itself when a company's total capital transcends the par value of its capital stock.
As opposed to impaired assets (which can never recapture their value), impaired capital can be remedied once total capital returns to a level higher than the par value of the capital stock.
With respect to a bank or trust company's capital accounts, impaired capital means that charges or losses have been adequate to kill all their allowance for loan and lease loss, undivided profits, surplus fund, and some other capital reserves. The charges or losses have brought the book amount of the capital stock below the par value of the capital stock.
Fast Fact
A bank or trust company might be forced to liquidate on the off chance that seriously impaired capital is brought about by unnecessary loan losses.
How to Remedy Impaired Capital?
In a situation where seriously impaired capital has come about because of unnecessary loan losses and other imperfect practices, a bank or trust company will be called upon by regulatory agencies to make up the deficiency by raising new capital, for the most part in the span of 90 days from notice, or liquidating.
One option for making up the deficiency is for the board of directors to levy an assessment on the common stockholders adequate to reestablish the capital stock. In the event that stockholders don't pay the assessments inside a predetermined time period, the board of directors can decide to sell enough of the stockholder's shares to collect the assessment.
Features
- Impaired capital is a side effect of negative retained earnings, which can occur if a firm issues an over the top amount of dividends.
- Impaired capital happens when a company's total capital turns out to be not exactly the par value of its capital stock.
- Impaired capital can be reversed once total capital increments and outperforms the par value of capital stock.
