Impaired Asset

What is an Impaired Asset?

An impaired asset is an asset that has a market value not exactly the value listed on the company's balance sheet. At the point when an asset is considered to be impaired, it should be written down on the company's balance sheet to its current market value.

How Impaired Assets Work

An asset is impaired assuming that its projected future cash flows are not exactly its current carrying value. An asset might become impaired because of tangibly adverse changes in legal factors that have changed the asset's value, massive changes in the asset's market price due to a change in consumer demand, or damage to its physical condition. One more indicator of potential impairment happens when an asset is very likely to be arranged prior to its original estimated disposal date. Asset accounts that are probably going to become impaired are the company's accounts receivable, goodwill, and fixed assets.

Long-term assets, like intangibles and fixed assets, are especially at risk of impairment on the grounds that the carrying value has a longer span of time to become impaired.

Assets are tried for impairment on a periodic basis to guarantee the company's total asset value isn't exaggerated on the balance sheet. As indicated by generally accepted accounting principles (GAAP), certain assets, like goodwill, ought to be tried on an annual basis. GAAP additionally suggests that companies think about events and economic conditions that happen between annual impairment tests to determine assuming it is "without a doubt" that the market value of an asset has dropped below its carrying value.

An impairment loss ought to possibly be recorded on the off chance that the anticipated future cash flows are unrecoverable. At the point when an impaired asset's carrying value is written down to market value, the loss is recognized on the company's income statement in a similar accounting period.

Accounting for Impaired Assets

The total dollar value of an impairment is the difference between the asset's carrying cost and the lower market value of the thing. The journal entry to record an impairment is a debit to a loss, or expense, account and a credit to the connected asset. A contra asset impairment account, which holds a balance inverse of the associated asset account, might be utilized for the credit to keep up with the historical cost of the asset on a separate detail. In this situation, the net of the asset, its accumulated depreciation, and the contra asset impairment account mirror the new carrying cost.

After recording the impairment, the asset has a diminished carrying cost. In later periods, the asset will be reported at its lower carrying cost. Even on the off chance that the impaired asset's market value returns to the original level, GAAP states the impaired asset must stay recorded at the lower adjusted dollar amount. This is in compliance with conservative accounting principles. Any increase in value is recognized upon the sale of the asset.

Standard GAAP practice is to test fixed assets for impairment at the lowest level where there are identifiable cash flows. For instance, a car manufacturer ought to test for impairment for every one of the machines in a manufacturing plant as opposed to for the undeniable level manufacturing plant itself. Be that as it may, assuming that there are no identifiable cash flows at this low level, it's allowable to test for impairment at the asset group or entity level. Assuming an asset group encounters impairment, the adjustment is allocated among all assets inside the group. This proration depends on the current carrying cost of the assets.

Asset Depreciation versus Asset Impairment

A capital asset is depreciated consistently to account for commonplace wear and tear on the thing after some time. The amount of depreciation taken each accounting period depends on a predetermined schedule utilizing either straight line or one of different accelerated depreciation methods. Depreciation contrasts from impairment, which is recorded as the consequence of a one-time or unusual drop in the market value of an asset.

At the point when a capital asset is impaired, the periodic amount of depreciation is adjusted moving forward. Retroactive changes are not required for adjusting the previous depreciation previously taken. In any case, depreciation charges are recalculated until the end of the asset's helpful life in view of the impaired asset's new carrying value as of the date of the impairment.

Real World Example of an Impaired Asset

In 2015, Microsoft recognized impairment losses on goodwill and other theoretical assets connected with its 2013 purchase of Nokia. Initially, Microsoft recognized goodwill connected with the acquisition of Nokia in the amount of $5.5 billion. The book value of this goodwill, and hence assets as a whole, reported on Microsoft's balance sheet were considered to be exaggerated when compared to the true market value. Since Microsoft had not had the option to capitalize on the likely benefits in the cellphone business, the company recognized an impairment loss.

Features

• Assets ought to be tried for impairment consistently to prevent overstatement on the balance sheet.
• At the point when an impaired asset's value is written down on the balance sheet, there is likewise a loss recorded on the income statement.
• Assets that are probably going to become impaired incorporate accounts receivable, as well as long-term assets like intangibles and fixed assets.