Impaired Asset

Loading the player...

What is an 'Impaired Asset'

An impaired asset is a company's asset that has a market price less than the value listed on the company's balance sheet. Accounts that are likely to be written down are the company's goodwill, accounts receivable and long-term assets because the carrying value has a longer span of time for impairment. Upon adjusting an impaired asset’s carrying value, the loss is recognized on the company’s income statement.

BREAKING DOWN 'Impaired Asset'

An impairment should only be recorded if the anticipated future cash flows are unrecoverable. The journal entry to record an impairment is a debit to a loss, or expense, account and a credit to the underlying asset. A contra asset impairment account may be used for the credit to maintain the original carrying cost of the asset on a separate line item. The net of the asset and contra asset reflect the new carrying cost. If an asset group experiences an impairment, the impairment adjustment is allocated among all assets within the group. This proration is based on the current carrying cost of the assets.

Asset’s Carrying Cost

The total dollar value of an impairment is the difference between the asset’s carrying cost and the market value of the item. Upon writing off the impairment, the asset has a reduced carrying cost because the adjustment recognized a loss and reduced the asset. In future periods, the asset must be reported at carrying cost. Even if the impaired asset’s market value returns to the original level, generally accepted accounting principles (GAAP) state the impaired asset must remain recorded at the adjusted dollar amount. Any increase in value is recognized upon the sale of the asset.

Tests for Impairments

An asset is impaired if projected cash flow losses are associated with the asset. In addition, an asset is impaired if there have been materially adverse changes in legal factors that have changed the asset’s value, significant changes in the asset’s market price or severe changes in the asset's manner of use due to its physical condition. Another indicator of an impaired asset is if the asset is more than 50% likely to be disposed of significantly before the original estimated disposal date.

Depreciation

A capital asset is depreciated based on the carrying cost of the asset. Therefore, if a capital asset is impaired, the periodic amount of depreciation is adjusted. Retroactive changes are not required for fixing the amount of depreciation to record. Only depreciation charges going forward are recalculated based on the impaired asset’s new carrying cost.

Impaired Asset Example

In 2015, Microsoft recognized impairment losses on goodwill and other assets related to its 2013 purchase of Nokia. Upon the acquisition, Microsoft recognized an increase in goodwill of $5.5 billion. However, because it had not been able to capitalize on the potential benefits in the cellphone business, Microsoft recognized the impairment loss as the book value assets and goodwill reported on its financial statements were overstated when compared to the true market value.

RELATED TERMS
  1. Impairment

    1. A reduction in a company's stated capital. 2. The total capital ...
  2. Carrying Value

    An accounting measure of value, where the value of an asset or ...
  3. Impaired Capital

    1. When a bank's actual assets are worth less than their stated ...
  4. Goodwill Impairment

    Goodwill that has become or is considered to be of lower value ...
  5. Book Value Reduction

    Reducing the value at which an asset is carried on the books ...
  6. Impaired Insurer

    An insurance company that is potentially unable to fulfill its ...
Related Articles
  1. Entrepreneurship & Small Business

    How Is Impairment Loss Calculated?

    Impairment loss is the decrease in an asset’s net carrying value that exceeds the future undisclosed cash flow it should generate.
  2. Investing

    What is an Impaired Asset?

    An impaired asset is one where the fair market value of the asset is less than the historical cost (or book value) of the asset.
  3. Managing Wealth

    Understanding Impairment

    In finance and accounting, impairment refers to the loss of value of a company’s capital stock.
  4. Investing

    Explaining Goodwill Impairment

    Goodwill impairment results when the fair market value of a company’s goodwill asset is less than its historical cost.
  5. Investing

    Impairment Charges: The Good, The Bad And The Ugly

    Impairment charge is the term for writing off worthless goodwill.
  6. Investing

    Goodwill Impairment Test: When You Overpay in M&A

    Overpaying for acquisitions can result in goodwill impairment charges and loss in stock value. How do companies test whether they have paid too much?
  7. Investing

    Accounting Rules Could Roil The Markets

    FAS 142 is an accounting rule that changes the way companies treat goodwill. Be aware of the impact it has on reported earnings to avoid making bad investment decisions.
  8. Investing

    Impairment Charges: The Good, The Bad And The Ugly

    Impairment charge is a term for writing off worthless goodwill, but you need to know what its potential impact is on EPS.
  9. Investing

    Understanding Historical Cost

    Historical cost equals the original purchase price of an asset recorded on a company’s balance sheet.
  10. Investing

    How Does Goodwill Affect Stock Prices?

    “If a business does well, the stock eventually follows.” - Warren Buffett
RELATED FAQS
  1. How is impairment loss calculated?

    Learn how companies re-evaluate their assets and compare them against book values to recognize impairment and why this strategy ... Read Answer >>
  2. How do businesses determine if an asset may be impaired?

    Find out how a business should determine if an asset may be impaired in accordance with the generally accepted accounting ... Read Answer >>
  3. How do you write off impaired assets from the financial statement?

    Learn what an impaired asset is and how it effects a company's financial statements. Understand how an accountant writes ... Read Answer >>
  4. How do accountants record impaired assets?

    Learn why accountants need to identify and record impaired assets, how impairments are measured and how they impact financial ... Read Answer >>
  5. What are some ways a business owner can reduce unlimited liability?

    Understand how a fixed asset becomes impaired. Learn the accounting practices of impairing a fixed asset, and how it's recognized ... Read Answer >>
  6. How are impaired assets treated under U.S. accounting rules?

    Learn how to identify, test and measure impaired assets under the generally accepted accounting principles, Statement 144 ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center