Question

Explain the meaning of an impairment of an asset. Provide several examples. What accounting event should occur when an asset has become substantially impaired?

Answer 1

Impairment of an Asset means decrease in value of assets or decrease in value of economic benefits drived from that asset from its present value. Impairment of asset is to be done in case of Value of tht asset decreased due to decrease in economic benefits driven from that asset.

Examples of Impairment of an asset -

- Due to damage in Asset.

- Due to change in Technology

- Due to obsolescene

- Due to some restrictions on use of that asset etc.

To measure the amount of Impairment of an asset is that difference between the Carrying amount of that asset - Recoverable amount. That Impairment loss is recognised in Income statement. If the carrying amount is less than the Recoverable value of that asset then there will be no impairment loss.

Accounting event or trestment

Impairment loss Account Dr.

To Asset Account   

Eg. Abc is having building of carrying value $2000 in books. Its life is 10 years. The company uses SLM method of depreciation. In second year the Government starts a fly over near the building and half of the building is going to be destroyed due to that fly over. Now the market value or recoverable value of that building is $ 800 and carrying value after one year depreciation is $ 1800 . The Impairment loss will be $ 1800 - $ 800 = $ 1000.