What Is Impairment Loss?

Impairment loss occurs when a business asset suffers an unexpected, permanent depr𓄧eciation in fair market value in excess of the book value of the asset on a company’s financi꧒al statements.

Assets can experience this decrease in value for a variety of reasons. These can include changes in market conditions, new government legislati🐎on, the enforcement of reg🎃ulations, new technologies, and more.

Under U.S. 澳洲𝐆幸运5开奖号码历史查询:generally accepted accounting principles, or GAAP, assets that are considered impaired must be recognized as a loss on an income statement.

Understanding Impairment Loss

The technical definition of impairment loss is a decrease in net 澳洲幸运5开奖号码历史查询:carrying value, the 澳洲幸运5开奖号码历史查询:acquisition cost minus depreciation, of an asset that is greater than the future undisclosed 澳洲幸运5开奖号码历史查询:cash flow of the same asset.

Impairment occurs when assets are sold or abandoned because the company no longer expects them to benefit long-run operations.

This is different from a 澳洲幸运5开奖号码历史查询:write-down, though impairment losses often result in a tax deferral for the asset.

Depending on the type of asset impaired, stockholders of a publicly held company may also lose equity in their shares. This results in a lower 澳洲幸运5开奖号码历史查询:debt-to-equity (D/E) ratio.

Calculating Impairment Loss

1. The first step is to identify the factors that lead to an asset’s impairment. Some factors may include changes in market conditions, new legislation or regulatory enforcement, turnover in the workforce, or 澳洲幸运5开奖号码历史查询:decreased asset functionality due to aging.

Inꦓ some circumstances, the asset itself may be functioning as well as ever, but new technology or new techniques may cause the fair market value of the asset to drop significantly.

2. A fair market calculation is key; asset impairment cannot be recognized without a good approximation of fair 澳洲幸运5开奖号码历史查询:market value. Fair market value is the price that the asset would fetch if it was sold on the market.

This is sometimes described as the 澳洲幸运5开奖号码历史查询:future cash flow that the asset would expect to generate in continued business operations. Another term for this value is൲ ✨“recoverable amount.”

3. Once the fair market value is assigned, it is then 澳洲幸运5开奖号码历史查询:compared with the carrying value of the asset as represented on the company’s financial statements.

澳洲幸运5开奖号码历史查询:Carrying value does not need to be recalculated at this time since it exists in previous accounting records.

4. If the calculated costs of holding t🌄he asset exceed the calculated fair market value, thꦅe asset is considered to be impaired.

If the asset in question is going to be disposed of, the costs associated with the disposal must be added back into the net of the future net value less the carrying value.

Impairment losses are either recognized through the cost model or the 澳洲幸运5开奖号码历史查询:revaluation model, depending on whether the debited amount was changed through the new, ad💯justed fair market valuation described above.

The Bottom Line

Impairment occursꦯ when a business asset suffers a permanent reduction in fair market value in excess of the book value of the asset on a company’s finaꦏncial statements.

Under U.🌱S. generally accepted accouဣnting principles (GAAP), assets that are considered impaired must be recognized as a loss on an income statement.