Asset impairment

💥 Asset Impairment – Explained Clearly

Asset impairment occurs when the carrying amount of an asset on the balance sheet is greater than its recoverable amount (i.e., it can no longer generate expected future economic benefits).

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🔍 What Is Impairment?

It’s an accounting adjustment that reduces the book value of an asset to reflect a permanent loss in value.

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📘 When Does Impairment Occur?

Common triggers:

• Market value decline

• Physical damage

• Obsolescence

• Legal or regulatory changes

• Poor economic performance of the asset

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🧮 Impairment Test Formula

$$\text{If: } \text{Carrying Amount} > \text{Recoverable Amount} \Rightarrow \text{Impairment Loss} = \text{Carrying Amount} - \text{Recoverable Amount}$$

Where:

• Carrying Amount = Asset’s value in books

• Recoverable Amount = Higher of:

  • Fair Value less Costs to Sell

  • Value in Use (Present value of expected cash flows)

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🧾 Journal Entry for Impairment Loss

Impairment Loss A/c .......... Dr
     To Asset A/c

➡️ This reduces the asset’s value on the balance sheet and affects net profit.

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📊 Financial Impact of Impairment

Statement	Impact
Income Statement	Impairment loss = expense, reduces net income
Balance Sheet	Asset value is reduced permanently
Cash Flow Statement	Non-cash item; added back in operating cash flow under indirect method

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🔄 Reversal of Impairment

Standard	Reversal Allowed?
IFRS	✅ Yes (except goodwill)
US GAAP	❌ No (reversal not allowed)

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🧠 Example

• Carrying Value of Equipment = ₹10 lakh

• Recoverable Amount = ₹6 lakh

• Impairment Loss = ₹4 lakh

Journal Entry:

Impairment Loss A/c ............ Dr ₹4,00,000  
     To Equipment A/c .................... ₹4,00,000

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📎 Common Assets Subject to Impairment

• Property, Plant & Equipment (PPE)

• Goodwill

• Intangibles (Patents, Copyrights)

• Investments

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✅ Best Practices

• Perform annual impairment testing for goodwill & intangibles

• Monitor for external & internal indicators of decline in asset value

• Document assumptions used in recoverable amount estimates