impairment

Examples of impairment in the following topics:

• Impairment Measurement

  • Certain assets with indefinite lives require an annual test for impairment.
  • Trademarks and Goodwill are examples of intangible assets that are tested for impairment on an annual basis.
  • Physical damage to an asset can result in an impairment loss.
  • The impairment of a building is measured by determining the amount of value the asset has lost.
  • Summarize the steps a company takes to measure an assets impairment

• Loss Restoration

  • Fixed asset values can be revised to reflect an increase or decrease in value; upward revisions can recover earlier impairment losses.
  • US GAAP does require that a business impair its assets if its fair market value decreases.
  • If an asset becomes impaired and an impairment loss results, the asset can fall under the revaluation model that allows periodic adjustments to the asset's book value.
  • An upward revision to an asset's value can recover prior impairment losses
  • Explain when it would be applicable to revalue an impaired asset

• Goodwill Impairment

  • Goodwill is an intangible asset that is tested yearly for impairment; it is not amortized.
  • Upon purchase, the buyer records $9 million in goodwill and tests it for impairment at the end of the year.
  • Goodwill's value on the balance sheet is reported at net of accumulated impairment loss, a contra asset account; the current impairment loss is reported on the income statement.
  • The impairment cost is calculated as follows: carrying value - recoverable amount.
  • According IAS 36, reversal of goodwill impairment losses are not allowed.

• Impairment Recognition

  • An impairment loss is recognized and accrued to record the asset's revaluation.
  • Certain intangible assets, such as goodwill, are tested for impairment on an annual basis.
  • After the impairment, depreciation expense is calculated using the asset's new value.
  • The impairment of an asset reduces its value on the balance sheet.
  • The cost of an impaired building beyond repair is disclosed as a loss on the income statement.

• Indefinite-Life Impairment

  • Because Indefinite-life tangibles continue to generate cash they can't be amortized; they must be evaluated for impairment yearly.
  • Instead of amortization, indefinite-life assets are evaluated for impairment yearly.
  • If an impairment has occurred, then a loss must be recognized.
  • When an intangible asset's impairment reverses and value is regained, the increase in value is recorded as a gain on the income statement and reduction to accumulated impairment loss on the balance sheet, up to the amount of impairment loss recorded in prior periods.
  • According to IAS 36, reversal of impairment losses for goodwill are not allowed.

• Limited-Life Impairment

  • Due to market conditions, the company believes the patent's value has decreased and tests it for impairment at the end of the year.
  • As a result of the impairment, the amortization expense on the patent should be adjusted to reflect the new value.
  • Only intangible assets with an indefinite life are reassessed each year for impairment.
  • When an intangible asset's impairment reverses and value is regained, the increase in value is recorded as a gain on the income statement and reduction to accumulated impairment loss on the balance sheet, up to the amount of impairment loss recorded in prior periods.
  • Summarize how to calculate the impairment on a limited life asset

• Analyzing Intangible Assets

  • Intangible assets with indefinite useful lives are reassessed each year for impairment.
  • If an impairment has occurred, then a loss must be recognized.
  • An impairment loss is determined by subtracting the asset's fair value from the asset's book or carrying value.
  • Goodwill has to be tested for impairment rather than amortized.
  • If impaired, goodwill is reduced and loss is recognized in the Income statement.

• Financial Statement Notes

  • For example, if a company lists a loss on a fixed asset impairment line in their income statement, notes could corroborate the reason for the impairment by describing how the asset became impaired.

• Reporting Equity Investments

  • Goodwill can now only be impaired under these GAAP standards.
  • To test goodwill for impairment, companies are now required to determine the fair value of the reporting units, using the present value of future cash flow, and compare it to their carrying value (book value of assets plus goodwill minus liabilities).
  • If the fair value is less than carrying value (impaired), the goodwill value needs to be reduced so that the fair value is equal to the carrying value.
  • The impairment loss is reported as a separate line item on the income statement, and the new adjusted value of goodwill is reported in the balance sheet.

• Amortization of Intangible Assets

  • Under US GAAP, the cost of intangible assets are either amortized over their respective useful/legal lives, or are tested for impairment on an annual basis.
  • Goodwill is an example of an intangible asset that has an indefinite useful life, and is therefore tested for impairment on an annual basis as opposed to being amortized on a straight line basis.
  • If the fair value of the reporting unit is less than its carrying value, goodwill has been impaired.
  • An impairment loss is recognized on the income statement and the goodwill account is reduced.
  • The impairment loss is calculated by subtracting the fair value of a reporting unit's net assets from the reporting unit's carrying value.