Impaired Asset
Definition:
Impaired assets are assets that have been damaged, deteriorated, or become unusable in their intended use. These assets are usually recorded at their reduced fair value, with the decline in value being recorded as an impairment loss.
Causes of Impairment:
- Physical damage or deterioration
- Changes in market conditions
- Technological obsolescence
- Obsolete or redundant technology
- Economic factors
- Legal or regulatory issues
Examples of Impaired Assets:
- Deteriorated equipment
- Obsolete inventory
- Damaged buildings
- Inoperative machinery
- Liable accounts receivable
Accounting Treatment:
When an asset becomes impaired, it is recorded at its recoverable value and the decline in value is recorded as an impairment loss in the current period. The impairment loss can be offset against other income or accumulated in a separate account for later recovery.
Financial Statements Impact:
Impaired assets can have a significant impact on financial statements. They can reduce the overall value of the company and increase the need for depreciation expense. The impairment loss can also affect the company’s tax liability and cash flow.
Example:
A company owns a fleet of equipment that is used in its manufacturing operations. Due to technological obsolescence, the equipment becomes impaired. The company records the equipment at its recoverable value and records an impairment loss for the difference between its original cost and its recoverable value.
Additional Notes:
- Assets that are impaired but still recoverable are known as impaired but still usable assets.
- The impairment loss is an extraordinary item and should be disclosed separately in the notes to the financial statements.
- The impairment of assets can be a complex accounting process and it is important to follow generally accepted accounting principles (GAAP) when impairing assets.
