What is Impairments

Impairment

Accounting rules also require that an impairment charges or expense be recognized if the value of assets declines unexpectedly. Such charges are usually non-recurring, and may relate to any type of asset.

Many companies consider write-offs of some of their long-lived assets because some property, plant, and equipment have suffered partial obsolescence.

Accountants reduce the asset's carrying amount by its fair value.

For example, if a company continues to incur losses because prices of a particular product or service are higher than the operating costs, companies consider write-offs of the particular asset. These write-offs are referred to as impairments. There are events and changes in circumstances might lead to impairment. Some other examples are:

·   Large amount of decrease in fair value of an asset.

·   A change of manner in which the asset is used.

·   Accumulation of costs that are not originally expected to acquire or construct an asset.

·   A projection of incurring losses associated with the particular asset.

Events or changes in circumstances indicate that the company may not be able recover the carrying amount of the asset. In which case, companies use the recoverability test to determine whether impairment has occurred. The steps to determine are:

1. Estimate the future cash flow of asset. (from the use of the asset to disposition)

 2. If the sum of the expected cash flow is less than the carrying amount of the asset, the asset is considered impaired.