Question

What do you understand by impairment of long-lived tangible asset?

Answer 1

Answer:

A long lived asset is any asset that a business expects to retain for at least one year. This definition can be broadened to include any asset that is expected to be retained for more than one accounting period. Long lived assets are usually classified into two subcategories, which are:

1. Tangible long lived assets. Included in this category are such assets as furniture and fixtures, manufacturing equipment, buildings, vehicles, and computer equipment.
2. Intangible long lived assets. Included in this category are such assets as copyrights, patents, and licenses.

Once acquired, the cost of a long lived asset is usually depreciated (for tangible assets) or amortized (for intangible assets) over the expected useful life of the asset. This is done in order to match the ongoing use of the asset with the economic benefits derived from it. This depreciation or amortization may be accelerated if use of the asset is expected to occur primarily in the earlier stages of its useful life, though such acceleration can also be used to defer tax payments.

Goodwill is also considered a long lived asset. Goodwill is the residual amount of the payment made for an acquiree that cannot be associated with any specific assets or liabilities. Goodwill is tested periodically to see if the fair value of the underlying acquiree assets and liabilities still match or exceed the recorded amounts related to the acquisition. If not, the goodwill balance is said to be impaired, and is reduced by the amount of the impairment.

A business that requires a large amount of long lived assets to conduct its operations usually has a large proportion of fixed costs in its cost structure, so it must earn a relatively large amount of gross profit before it can begin to earn a net profit. Thus, a reasonable strategic objective is to find a way to run a business with the smallest possible amount of long lived assets, thereby reducing the break even point of a business.