IMPAIRMENT OF ASSETS

An impaired asset refers to a condition in which a companys asset worth less on the market
than the value stated on the companys balance sheet. This means that an assets 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.