Definition§
An impairment review is a procedure mandated by accounting standards where entities evaluate the recoverability of the carrying amount of their fixed assets and goodwill. This review is triggered by specific events or changes in circumstances that could indicate a potential impairment. If the carrying amount exceeds the recoverable amount, an impairment loss is recognized.
Examples§
- ** Machinery Breakdown**: If a company’s machinery experiences severe malfunction and loses value, an impairment review is conducted to determine if the carrying amount exceeds the machinery’s recoverable amount.
- Goodwill in Acquisitions: After acquiring a company, changes in market conditions may lead to a reassessment of the goodwill’s value. An impairment review ensures the goodwill on the balance sheet reflects its true value.
- Economic Downturn: A retailer experiencing a decline in sales due to an economic downturn may need to perform an impairment review on store assets.
Frequently Asked Questions§
What triggers an impairment review?§
Events like significant declines in market value, changes in market conditions affecting the asset’s use, and internal changes affecting the business’ cash flows can trigger an impairment review.
How is the carrying amount determined?§
The carrying amount is typically the book value of the asset, which includes the cost of acquisition minus accumulated depreciation and any previous impairment losses.
What is a recoverable amount?§
The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use, which is the present value of future cash flows expected from the asset.
What are the consequences of an impairment loss?§
When an impairment loss is recognized, it reduces the carrying amount of the asset on the balance sheet and affects the entity’s income statement by reducing net earnings.
How often should impairment reviews be conducted?§
Impairment reviews should be conducted annually for assets with indefinite useful lives, such as goodwill, or whenever there is an indication that an asset might be impaired.
Related Terms§
- Carrying Amount: The value of an asset as reported on the balance sheet, calculated as acquisition cost minus accumulated depreciation and impairment losses.
- Fixed Asset: Long-term tangible property used in the operation of a business, not expected to be consumed or converted into cash within a year.
- Goodwill: An intangible asset arising from the acquisition of one company by another, representing the excess purchase price over the fair value of identifiable net assets.
- IFRS: International Financial Reporting Standards, a set of accounting standards developed by the International Accounting Standards Board (IASB) that provide guidelines for financial reporting.
Online References§
- IASB - Conceptual Framework for Financial Reporting
- FASB - Accounting Standards Codification
- International Accounting Standard (IAS) 36 - Impairment of Assets
Suggested Books for Further Studies§
- International Financial Reporting Standards (IFRS) 2018 by the International Accounting Standards Board (IASB)
- Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- Accounting for Impairment by Jeffrey R. Garaventa
Accounting Basics: “Impairment Review” Fundamentals Quiz§
Thank you for joining us in exploring the fundamentals of impairment reviews. This content ensures a solid understanding of how entities maintain accurate financial statements by assessing the recoverability of their asset values.umeric-action:_expandAll
