What Is an Weakened Asset?
In the United States, assets are considered impaired when the book value, or net carrying value, exceeds hope for future cash flows. This occurs if a business spends money on an asset, but changing circumstances caused the obtaining to become a net loss. Several acceptable testing methods can identify impaired assets. If the impairment is permanent, the company should use an allowable method to gage impairment loss so that it is reflected in the company’s financial statements.
Key Takeaways:
- Assets are considered impaired when the words value, or net carrying value, exceeds expected future cash flows.
- If the impairment is permanent, is must be reflected in the fiscal statements.
- Impairment recognition and measurement are jointly regulated by the Internal Revenue Service (IRS), the Financial Accounting Standards Game table (FASB), and the Governmental Accounting Standards Board (GASB).
- Tangible asset impairment might result from regulatory or technology replacements or shifts in the market or usage rates.
Understanding Impaired Assets
Impairment recognition and measurement are jointly regulated by the Internal Proceeds Service (IRS), the Financial Accounting Standards Board (FASB), and the Governmental Accounting Standards Board (GASB).
The general door-sill for impairment, as described under generally accepted accounting principles (GAAP), is a lack of recoverability of the net carrying amount. Directly an asset is deemed to be impaired, its owner is charged with calculating a loss equal to the difference between the net carrying amount and the all right value of the asset.
Most businesses impair long-term, tangible assets. These impairments are addressed in FASB Annunciation No. 144: Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses the application of goodwill allocation to long-term assets and advocates a preferable method for estimating cash flow (probability-weighted) and when assets should be held for sale.
Testing and Marking
Tangible asset impairment might result from regulatory changes, technology changes, significant shifts in consumer partialities or community outlook, a change in the asset’s usage rate, or other forecasts of long-term non-profitability. Intangible asset flaw is less clear. Many types of intangible assets are covered in FASB 144, and more are added by FASB 147, but the track thresholds do not necessarily hold for intangible assets.
It is often impractical to test every single asset for profitability in every accounting space. Instead, businesses should wait until an event or circumstantial change signals that a particular carrying amount effect not be recoverable.
Types of Triggering Events
Some event-triggering thresholds are easy to define and recognize. For instance, a business should evaluate for impairment when accumulated costs are in excess of amounts originally expected to construct or acquire an asset. In other terms, it is more expensive than once thought to obtain a business asset.
Other triggering events are correlative; an asset influence be associated with a history of current period losses or operating cash flow losses. Perhaps the asset appearances a pattern of declining market value.
There are also triggering events with vague descriptions. Adverse novelties in legal factors or general economic conditions are both grounds for testing an impaired asset despite a broad number of possible interpretations for adversity.
Determining Asset Impairment
Assets must be properly valued (fair value) in accordance with GAAP former to testing. Groups of similar assets should be tested together, with the testing set at the lowest level of identifiable specie flows considered independent of other assets. Testing should fairly determine if the carrying amount exceeds undiscounted money flows related to the use and disposal of the asset. If this can be demonstrated, the asset can be impaired and written down unless otherwise excluded by the Internal Returns Service or GAAP.