Accounting Reminders: Impairment Of Non-Financial Assets

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What is impairment?

Impairment refers to a drastic and often permanent reduction in the value of a company’s asset to below its carrying value. Accounting standards require entities to ensure that their assets are not carried at a value more than their recoverable amount, therefore, any difference between an asset’s carrying amount and recoverable amount is recognised as an impairment loss.

Impairment of non-financial assets

At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired. If there is an indication that an asset may be impaired, then the asset’s recoverable amount must be calculated.

Indicators of impairment

An indicator of impairment can be defined as anything, such as a new event or circumstance, which could potentially result in the carrying value of a fixed asset not being fully recoverable. Data and analysis pertaining to the entity’s operations are the primary sources for determining if an indicator of impairment exists.

International Accounting Standards

IAS 36 (Impairment of Assets) has a list of external and internal indicators of impairment. This list is not exhaustive and mainly serves as guidance for entities for identifying potential impairment of non-financial assets.

External sources:

  • decline in market value of asset
  • negative changes in technology, markets, economy, or laws
  • increases in market interest rates
  • net assets of the entity are higher than market capitalisation

Internal sources:

  • obsolescence or physical damage to assets
  • asset is idle, part of a restructuring or held for disposal
  • worse economic performance than expected
US GAAP

ASC 360 (Property, Plant, and Equipment) provides the below examples for indicators of impairment:

  • A significant decrease in the market price of a long-lived asset (asset group)
  • A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition
  • A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator
  • An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group)
  • A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group)
  • A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life (the term “more likely than not” refers to a level of likelihood that is more than 50 percent)

Key concepts

Impairment loss: the amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount

Carrying amount: the amount at which an asset is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses

Recoverable amount: the higher of an asset’s fair value less costs of disposal (sometimes called net selling price) and its value in use

Fair value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Value in use: the present value of the future cash flows expected to be derived from an asset or cash-generating unit

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