Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources Impairment of Assets
Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources
Accounting Textbooks Boundless Accounting
Accounting Textbooks
Accounting
Concept Version 7
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Impairment Recognition

An impairment loss is recognized and accrued through a journal entry to record and reevaluate the asset's value.

Learning Objective

  • Explain how to assess an asset for impairment

Key Points

    • Business assets should be tested for impairment when a situation occurs that causes the asset to lose value. Certain intangible assets, such as goodwill, are tested for impairment on an annual basis.
    • Impairment losses can occur for a variety of reasons: physical damage to the asset, a permanent reduction in market value, legal issues against the asset, and early asset disposal.
    • An impairment loss is recognized through a journal entry that debits Loss on Impairment, debits the asset's Accumulated Depreciation and credits the Asset to reflect its new lower value.

Terms

  • depreciation

    The measurement of the decline in value of assets. Not to be confused with impairment, which is the measurement of the unplanned, extraordinary decline in value of assets.

  • accrue

    To increase, to augment; to come to by way of increase; to arise or spring as a growth or result; to be added as increase, profit, or damage, especially as the produce of money lent.

Full Text

Impairment Recognition

Business assets should be tested for impairment when a situation occurs that causes the asset to lose value. An impairment loss is recognized and accrued to record the asset's revaluation. Once an asset has been revalued, fluctuations in market value are calculated periodically. Certain intangible assets, such as goodwill, are tested for impairment on an annual basis. Impairment losses can occur for a variety of reasons:

  • when an asset is badly damaged (negative change in physical condition)
  • the asset's market price has been significantly reduced
  • legal issues have had a negative impact on the asset
  • the asset is set for disposal before the end of its useful life A loss on impairment is recognized as a debit to Loss on Impairment (the difference between the new fair market value and current book value of the asset) and a credit to the asset. The loss will reduce income in the income statement and reduce total assets on the balance sheet.

A loss on impairment is recognized as a debit to Loss on Impairment (the difference between the new fair market value and current book value of the asset) and a credit to the asset.The loss will reduce income in the income statement and reduce total assets on the balance sheet.

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.

For an example, take a retail store that is recorded on the owner's balance sheet as a non-current asset worth USD 20,000 (book value or carrying value is USD 20,000). Based on the asset's book value, assume the store has a historical cost of USD 25,000 and accumulated depreciation of USD 5,000. A hurricane sweeps through the town and damages the store's building. After assessing the amount of the damage, the owner calculates that the building's market value has fallen to USD 12,000.

The Loss on Impairment is calculated to be USD 8,000 (20,000 book value - 12,000 market value)

The journal entry to recognize the Loss on Impairment:

  • Debit Loss on Impairment for USD 8,000
  • Debit Store Building-Accumulated Depreciation for USD 5,000
  • Credit Store Building for USD 13,000

The Loss on Impairment for USD 8,000 is recognized on the income statement as a reduction to the period's income and the asset Store Building is recognized at its reduced value of USD 12,000 on the balance sheet (25,000 historical cost - 8,000 impairment loss - 5,000 accumulated depreciation). After the impairment, depreciation expense is calculated using the asset's new value.

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