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 5
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Impairment Measurement

Business assets that have suffered a loss in value are given two tests to measure and recognize the amount of the loss.

Learning Objective

  • Summarize the steps a company takes to measure an assets impairment

Key Points

    • Two tests are performed to determine the amount of an impairment loss: recoverability and measurement.
    • The recoverability test evaluates if an asset's undiscounted future cash flows are less than the asset's book value. When cash flows are less, the loss is measured.
    • The measurement test uses the difference between the asset's market value and book value to calculate the amount of the impairment loss.

Terms

  • intangible asset

    Any valuable property of a business that does not appear on the balance sheet, including intellectual property, customer lists, and goodwill.

  • cash flows

    cash received or paid by a company for its business activities.

  • recoverability

    The property of being able to recover.

Full Text

Business assets that have suffered a loss in value are subject to impairment testing to measure and recognize the amount of the loss.

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.

To measure the amount of the loss involves two steps:

  • Perform a recoverability test is to determine if an impairment loss has occurred by evaluating whether the future value of the asset's undiscounted cash flows is less than the book value of the asset. If the cash flows are less than book value, the loss is measured.
  • Measure the impairment loss by calculating the difference between the book value and the market value of the asset.

The use of undiscounted cash flows in determining impairment loss assumes that the cash flows are certain and risk-free, and the timing of the cash flows is ignored. For example, assume a new USD 20,000 sewing machine, with a useful of life of 3 years, is damaged and has a new book value of USD 10,000.

The expected undiscounted cash flows generated by the machine after the damage are:

  • USD 2,000 in Year1
  • USD 2,000 in Year2
  • USD 2,000 in Year3

Since the asset's future undiscounted cash flows are USD 6,000, less than the USD 10,000 book value, an impairment loss has occurred. Use the market value of the sewing machine, USD 20,000, and deduct the USD 10,000 book value to arrive at an impairment loss of USD 10,000.

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.

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