Question

Explain why the impairment of intangible assets causes such difficulty to companies when preparing their accounts.

Answer 1

The impairment of a intangible asset can be described as an sudden decrease in fair value due to physical damage, changes in existing laws creating a permanent decrease, increased competition, poor management, obsolescence of technology, etc.

An intangible asset’s annual amortization expense reduces its value on the balance sheet, which reduces the amount of total assets in the assets section of the balance sheet. This occurs until the end of the intangible asset’s useful life.

Annual amortization expense reduces net income on the income statement, which also reduces retained earnings in the stockholders’ equity section of the balance sheet