Question

Cam plc has 2 investments: a.) investment in listed shares is available for sale as financial asset, current market value is $405,000. shares were bought for $675,000. b.) investment in 3 year bond with amortized cost of $450,000 with a stated and effective interest rate of 7%(current market rate is 10%). After 2 years cam plc is not expecting to receive the last year's interest and expects to receive only 2/3 of the principal.

Question: What is impairment? What impairment should be recorded in the accounts of cam plc for the listed shares and the 3 year bond?

Answer 1

In accounting, impairment describes a permanent reduction in the value of a company's asset, typically a fixed asset or an intangible asset. When testing an asset for impairment, the total profit, cash flow, or other benefit expected to be generated by that specific asset is periodically compared with its current book value. If it is determined that the book value of the asset exceeds the future cash flow or benefit of the asset, the difference between the two is written off and the value of the asset declines on the company's balance sheet.

Fixed assets, such as machinery and equipment, depreciate in value over time. The amount of depreciation taken each accounting period is based on a predetermined schedule using either straight line or one of multiple accelerated depreciation methods. Depreciation schedules allow for a set distribution of the reduction of an asset's value over its entire lifetime. Unlike impairment, which accounts for an unusual and drastic drop in the fair value of an asset, depreciation is used to account for typical wear and tear on fixed assets over time.

Under generally accepted accounting principles (GAAP), assets are considered to be impaired when the fair value falls below the book value. Any write-off due to an impairment loss can have adverse affects on a company's balance sheet and its resulting financial ratios. It is, therefore, very important for a company to test its assets for impairment periodically. Certain assets, such as the intangible goodwill, must be tested for impairment on an annual basis in order to ensure the value of assets are not inflated on the balance sheet.

Impairment describes a permanent reduction in the value of a company's asset, typically a fixed asset or an intangible asset