Impaired Asset - Explained
What is an Impaired Asset?
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Table of ContentsWhat is an Impaired Asset?How is an Impaired Asset Used?Assets Carrying CostTests for ImpairmentsDepreciationImpaired Asset ExampleAcademic Research on Impaired Asset
What is an Impaired Asset?
A company's asset whose market value is lower than the value presented on the company's balance sheet or the book value of the asset is an impaired asset. Impairment occurs to the value of an asset when there is a sudden decrease in the market (present) value of the asset in which it becomes lesser than the book value of the asset. An impaired asset is one which it's carrying value outweighs its present value otherwise referred to as recoverable value. Impaired assets have impact on a company's balance sheet.
How is an Impaired Asset Used?
When the recoverable value of an asset is less than its carrying value, the asset is an impaired asset. Companies enter impairment as they occur to assets in the journal entry. However, it is vital to state that only if the estimated cash flow of a particular asset is not recoverable can the asset be recorded as an impaired asset. If there is a tendency for recoverability of expected future cash flows, an impairment should not be recorded in the journal entry. Debit to a loss or expense is the common term used when recording an impairment in a company's journal entry. Also, if a group of asset become impaired, the impairment will be allocated across all assets.
Assets Carrying Cost
The difference between the carrying value of an asset and the recoverable value sums up to give the impairment value. Usually, an impairment occurs when the present or market value of an asset is less than the book value of the asset, hence, to realize the value of the impairment, both values are calculated and deducted. In a case where an impairment is written off, the carrying cost of the asset must also be aligned to this occurrence. According to GAAP, an impaired asset must be put in record if the market (present) value goes back to the normal level, this must be recorded in dollar equivalence.
Tests for Impairments
There are quite a number of ways to test or account for impairment in assets, the following factors indicate impairment of asset. When the value of an asset is adversely affected or a company realizes losses in projected cash flow due to drop in the value of an asset, an impairment has occurred. Drastic or sudden changes in the market price (value) of an asset can also account for impairment in the asset. Also, if the disposal date of an asset is moved forward due to intrinsic negative effects, the asset is said to be am impaired asset.
One significant development that follows impairment in an asset is depreciation of the value of the asset. In a typical situation, an assets carrying cost determines depreciation in the capital or value of the asset. Since an impaired asset is attributed a new carrying cost, the depreciation of the asset is estimated using the new carrying cost. An impaired asset is one that witnesses an adjusted depreciation.
Impaired Asset Example
There are quite a number of the occurrence of impairment in assets across companies and industries. The most common one was when Microsoft had impaired assets and losses on goodwill in 2015. According to a report, impairment losses on assets and goodwill that Microsoft experienced was linked to 2013, when it acquired Nokia. Although, this acquisition increased the goodwill of Microsoft at first, Microsofts inability to maximize the potential of the business led to impairment which was also reported in its financial statement.