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What is an ‘Impaired Asset’
An impaired asset is a company’s asset that has a merchandise price less than the value listed on the company’s balance veneer. Accounts that are likely to be written down are the company’s goodwill, accounts receivable and long-term assets because the conveying value has a longer span of time for impairment. Upon adjusting an injured asset’s carrying value, the loss is recognized on the company’s income disclosure.
BREAKING DOWN ‘Impaired Asset’
An impairment should only be recorded if the expected future cash flows are unrecoverable. The journal entry to record an decrease is a debit to a loss, or expense, account and a credit to the underlying asset. A contra asset deterioration account may be used for the credit to maintain the original carrying cost of the asset on a away line item. The net of the asset and contra asset reflect the new carrying fetch. If an asset group experiences an impairment, the impairment adjustment is allocated among all assets within the conglomeration. This proration is based on the current carrying cost of the assets.
Asset’s Handle Cost
The total dollar value of an impairment is the difference between the asset’s take cost and the market value of the item. Upon writing off the impairment, the asset has a minimized carrying cost because the adjustment recognized a loss and reduced the asset. In approaching periods, the asset must be reported at carrying cost. Even if the damaged asset’s market value returns to the original level, generally took accounting principles (GAAP) state the impaired asset must carcass recorded at the adjusted dollar amount. Any increase in value is recognized upon the traffic of the asset.
Tests for Impairments
An asset is impaired if projected cash trickle losses are associated with the asset. In addition, an asset is impaired if there take been materially adverse changes in legal factors that from changed the asset’s value, significant changes in the asset’s market assay or severe changes in the asset’s manner of use due to its physical condition. Another blame for of an impaired asset is if the asset is more than 50% likely to be likely of significantly before the original estimated disposal date.
Depreciation
A cap asset is depreciated based on the carrying cost of the asset. Therefore, if a ripping asset is impaired, the periodic amount of depreciation is adjusted. Retroactive shifts are not required for fixing the amount of depreciation to record. Only depreciation instructs going forward are recalculated based on the impaired asset’s new carrying expense.
Impaired Asset Example
In 2015, Microsoft recognized impairment disadvantages on goodwill and other assets related to its 2013 purchase of Nokia. When the possessions was completed, Microsoft recognized an increase in goodwill of $5.5 billion. Nevertheless, because it had not been able to capitalize on the potential benefits in the cellphone profession, Microsoft recognized the impairment loss as the book value assets and goodwill reported on its fiscal statements were overstated when compared to the true market value.