Question

What is an impairment of a fixed asset? When is an asset impaired? How

is the impairment expense calculated?

Answer 1

• Conceptually Speaking, impairment of fixed asset refers to the decrease in the value of fixed asset below its carrying book value.
• We know that Book Value of an asset = Cost – Accumulated Depreciation.
• However decrease in the values can be analysed in two ways:

>the value of net cash flows expected from assets,
>the fair value of fixed asset.

• How to check if the Asset is impaired?

--To check that, Net Cash Flows expected from fixed assets are compared with current book value. If Book Value is more than those Cash flows, there is an Impairment.

• Example: Book value of asset on Jan 1 2019 =$ 22,500, Net Cash flow expected = $ 12000

Book Value on Jan 1, 2019	$                                   22,500.00
Net Cash Flows expected	$                                   12,000.00
Impairment exists??	YES, because the expected future net cash flows are LESS than Book Value

• Now, the question is how to record Impairment expense.

--Impairment expense = Book Value of impaired assets – Fair value of that asset

--In above example, say the fair value was $ 10,000

A	Book Value on Jan 1, 2019	$                                   22,500.00
B	Current Fair Value	$                                   10,000.00
C = A - B	Loss Related to the impairment	$                                   12,500.00

• Recording of Impairment

Date	Accounts title	Debit	Credit
2019, Jan 1	Loss from Impairment or Impairment expense	$                                   12,500.00
	Equipment		$                  12,500.00
	(impairment recorded)