Impairment of assets
This query is : Resolved
Niranjana Murthy BN
(Querist)
21 March 2016
plz explain impairment with example
22 March 2016
Impairment is a permanent decline in the value of an asset. This situation exists when the cash flows or other benefits generated by an asset decline, as determined through a periodic assessment. If there is impairment, then the difference between the fair value of the asset and its carrying amount is written off.
Depending on the situation, an impairment can cause a major decline in the book value of a business.
The term impairment is usually associated with a long-lived asset that has a market which has decreased significantly. For example, a meat packing plant may have recently spent large amounts for capital expenditures and then experienced a dramatic drop in the plant's value due to business and community conditions.
If the undiscounted future cash flows from the asset (including the sale amount) are less than the asset's carrying amount, an impairment loss must be reported.
If the impairment loss must be reported, the amount of the impairment loss is measured by subtracting the asset's fair value from its carrying value. Thus Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use).
Depending on the situation, an impairment can cause a major decline in the book value of a business.
The term impairment is usually associated with a long-lived asset that has a market which has decreased significantly. For example, a meat packing plant may have recently spent large amounts for capital expenditures and then experienced a dramatic drop in the plant's value due to business and community conditions.
If the undiscounted future cash flows from the asset (including the sale amount) are less than the asset's carrying amount, an impairment loss must be reported.
If the impairment loss must be reported, the amount of the impairment loss is measured by subtracting the asset's fair value from its carrying value. Thus Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use).
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