IMPAIRMENT OF ASSETS

An impaired asset refers to a condition in which a company’s asset worth less on the market than the value stated on the company’s balance sheet. This means that an asset’s book value is more than its market value. Physical damage to the capital asset, such as a factory, machines or inventory, product obsolescence due to technological changing and innovation, or changes to the legal code could lead to impairment of assets. Impairments can be written down, accounts that are likely to be written off are accounts receivable, the company's goodwill, long-term assets as well.

The main objective of this standard is to ensure the assets’ value revealed in the balance sheet, as the carrying amounts are not overstated than their recoverable amounts. Assets can be retrieved through net selling price or value-in-use. The asset value is considered to be overstated in the balance sheet, and will have to be adjusted for an impairment loss, if the carrying amount is higher than the recoverable amount. It is necessary to write down the book value of an asset by crediting the respective asset account and debiting a loss account (expense in the income statement) due to the future cash flows to be obtained from the asset will be less than the net difference between the value of market and book. This is an ordinary occurrence for prestige where a company will purchase the other company for more than the value of the net assets of the target company. For impairment of assets, under US GAAP, goodwill is annually tested.

Carrying amount, net selling price, value-in-use (projected future cash flows and factor of discount) are determined by the key computations in order to calculate and compare the relevant figures. Accounting for the impairment losses of assets carried at cost and valuation.

Basically, for impairment, with the exception of prestige and intangible assets with indefinite useful lives, the standard requires an entity test when there is an indication that an asset might be impaired. When carrying out impairment tests, possible impairment is not required to be calculated for all assets. The standard advises to evaluate the conditions that could be suggestive of a higher risk of impairment.

Impairment tests and the calculations involved are judgmental in nature and constantly subjective. Consequently, this area is very troublesome, complicated, onerous and hard to understand and apply. Moreover, the standard has been rewritten recently to get into consideration of new developments in the accounting treatment of prestige and intangible assets with indefinite useful lives.