Impairment imageWhen the carrying amount of a long-lived asset (or group of assets) is not recoverable from expected future cash flows, an impairment has occurred. The owner of the asset no longer expects to be able to generate returns of cash from the asset sufficient to recapture its recorded net book value. A loss is recognized for the amount needed to reduce the asset to its fair value (i.e., debit loss and credit the asset). The downward revised carrying value will be depreciated over its remaining estimated life.

Measurements of impairment involve subjective components and judgment. These factors should be taken into consideration: significant decrease in market value, physical condition has declined unexpectedly, the asset is no longer used as intended, legal or regulatory issues have impeded the asset, the overall business seems threatened by unsuccessful performance, and so forth. In addition, the specific methods for determining if an impairment has occurred vary globally. While the U.S. approach focuses first on cash recovery, global standards look to a more restrictive fair value test.

 

Did you learn?
Understand the fundamental accounting issues pertaining to asset impairments.