Asset Impairment: Recognition and Measurement Process

Asset impairment is a an accounting concept that ensures assets are not overstated on the balance sheet. When events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, companies must evaluate and recognize an impairment loss if necessary.

1. What Is Asset Impairment?

Asset impairment occurs when the carrying amount (book value) of a long-term asset exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use (present value of future cash flows expected from the asset).

Key Points:

• Applies mainly to long-lived assets such as property, plant, and equipment (PPE), intangible assets, and goodwill.

• An impairment loss is recognized in the income statement when the asset’s recoverable amount falls below its carrying value.

• Land is not impaired unless evidence suggests a loss of value.

2. Triggers for Impairment Testing

Impairment testing is required when events or changes indicate that the asset’s value may have declined. Common triggers include:

• Significant decline in asset market value.

• Adverse changes in technology, markets, laws, or economy.

• Physical damage or obsolescence.

• Worse-than-expected performance.

Standards require annual impairment tests for goodwill and indefinite-lived intangibles regardless of triggers.

3. Impairment Testing Process

a) Identify Indicators of Impairment

Review internal and external sources for any sign of impairment at each reporting date.

b) Estimate Recoverable Amount

Determine the higher of:

• Fair Value Less Costs to Sell (amount obtainable from sale minus costs).

• Value in Use (present value of expected future cash flows from asset use and disposal).

c) Compare Carrying Amount and Recoverable Amount

• If carrying amount > recoverable amount: Recognize impairment loss.

• If carrying amount ≤ recoverable amount: No impairment.

4. Recognition and Measurement

a) Recording an Impairment Loss

Impairment loss = Carrying amount − Recoverable amount

Journal Entry Example:

• Dr. Impairment Loss (Expense, income statement)

• Cr. Accumulated Impairment (Contra-asset, balance sheet)

b) Subsequent Accounting

• After impairment, depreciate the new asset value over its remaining useful life.

• Under IFRS, certain impairment losses (except goodwill) may be reversed in later periods if circumstances change. Under US GAAP, reversals are generally prohibited.

5. Financial Statement Presentation

• Income Statement: Impairment loss is recorded as a separate line or within operating expenses.

• Balance Sheet: Asset is presented at its new, lower carrying value (net of accumulated impairment).

6. Standards Reference (US GAAP & IFRS)

• US GAAP: ASC 360 (long-lived assets), ASC 350 (intangible assets, goodwill)

• IFRS: IAS 36 (Impairment of Assets)

Major Differences

• IFRS allows reversal of impairment (except for goodwill).

• GAAP does not permit reversal of impairment losses.

7. Example: Impairment of Equipment

Scenario:

• Carrying amount: $80,000

• Estimated future cash flows (undiscounted, US GAAP): $75,000

• Fair value less costs to sell: $60,000

• Value in use (IFRS): $62,000

Impairment Test:

• Under US GAAP: Compare carrying amount to undiscounted cash flows → $80,000 > $75,000 (impaired)

• Impairment loss = $80,000 − $60,000 = $20,000

Journal Entry:

• Dr. Impairment Loss $20,000

• Cr. Accumulated Impairment $20,000

8. Disclosure Requirements

Financial statements must disclose:

• The amount of impairment losses recognized or reversed.

• The events leading to the impairment.

• The nature of the asset impaired.

• The method and assumptions used in estimating recoverable amount.

9. Common Errors and Best Practices

• Ignoring indicators: Regularly review for impairment indicators.

• Incorrect cash flow estimates: Use reasonable, supportable assumptions.

• Not documenting process: Maintain clear records for audit and compliance.

• Omitting disclosures: Fully explain impairment events in notes.

10. Example Table: Impairment Calculation

Asset	Carrying Amount	Recoverable Amount	Impairment Loss
Equipment	$80,000	$60,000	$20,000
Patent	$50,000	$45,000	$5,000
Goodwill	$120,000	$100,000	$20,000

____________

FOLLOW US FOR MORE.

DATA STUDIOS

datastudios.org