Question

Walkin Inc. is considering the write-down of its long-term plant because of a lack of profitability. Explain to the management of Walk-in how to determine whether a write-down is permitted.​

Answer 1

Due to Frequent changes in Technology and with the era of Innovations, Technology changes at very fast pace and old technology become Obsolete with time. In business, Assets become Obsolete and hence their value drops drastically. therefore we need to write down the assets. the above concept is known as IMPAIRMENT OF ASSETS. and IMPAIRMENT LOSS is recorded in books of accounts.

This could be done due to various reasons such as Change in Technology, Change in Value in use of asset, Change in selling price of assets etc.

Impairment Loss: Carrying Amount - Recoverable Amount

Carrying Amount: Value of Asset in books of Account

Recoverable Amount: Least of Value in Use or Net selling price

Value in use: Present Value of Estimated Cashflows expected to arise from use of the asset.

Management of the company wants to record Impairment loss of Plant because of lack of profitability. we have to consider whether or not such lack of profitability is attributable to such plant. if yes, then management can proceed with such Impairment, if not, then Management can not record Impairment loss in the books