Question

would manager prefer recognizing asset impairment loss? Why?

Answer 1

Impairment is recorded when an asset's carrying amount is not recoverable. An asset is not recoverable if the carrying amount exceeds the expected future cash flows to be derived from the asset on an undiscounted basis.

The carrying amount of the long-lived asset or asset group is compared with the fair value of the asset. The impairment loss is measured as the amount by which the asset's carrying amount exceeds its fair value

In accordance with ASC 820-10, fair value should be calculated as the "price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Impairment charges are recorded directly against the carrying amount of the asset, which creates a new cost basis for the asset that is amortized over its remaining useful life.

Reversal of impairment charges prohibited

if the circumstances associated with the long-lived asset have changed or a significant event has occurred that may affect the recoverability of the carrying amount of the long-lived asset, an impairment indicator exists and the entity should test the long-lived asset for impairment. Before testing for impairment, the entity should group the long-lived assets with other assets at the lowest level of identifiable cash flows that are largely independent of cash flows from other assets or groups of assets. The lowest level of identifiable cash flows is termed an "asset group" under U.S. GAAP.

Under ASC 360-10-35-20, if an asset is impaired, the impairment loss should trigger the adjustment of the carrying amount of a long-lived asset to a new cost basis. ASC 360-10-35-20 further states, "For a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over the remaining useful life of that asset." That is, the asset's accumulated depreciation should be written off to reset the value of the asset.

Reasons for Recognition

Business assets should be tested for impairment when a situation occurs that causes the asset to lose value. An impairment loss is recognized and accrued to record the asset’s revaluation. Once an asset has been revalued, fluctuations in market value are calculated periodically. Certain intangible assets, such as goodwill, are tested for impairment on an annual basis. Impairment losses can occur for a variety of reasons:

1 . when an asset is badly damaged (negative change in physical condition)

2 .The asset’s market price has been significantly reduced

3 . Legal issues have had a negative impact on the asset

4 . The asset is set for disposal before the end of its useful life A loss on impairment is recognized as a debit to Loss on Impairment (the difference between the new fair market value and current book value of the asset) and a credit to the asset. The loss will reduce income in the income statement and reduce total assets on the balance sheet.

A loss on impairment is recognized as a debit to Loss on Impairment (the difference between the new fair market value and current book value of the asset) and a credit to the asset.The loss will reduce income in the income statement and reduce total assets on the balance sheet.