In the United States, assets are considered impaired when net carrying value (book value) exceeds expected future cash flows. This means a business spent money on an asset, but changing circumstances caused the purchase to be a net loss. Several acceptable testing methods can identify impaired assets. If the impairment is permanent, the company should use an allowable method for measuring impairment loss to be recognized in the financial statements.

Laws Governing Impaired Assets

Impairment recognition and measurement are jointly regulated by the Internal Revenue Service (IRS), the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).

The general threshold for impairment, as described under generally accepted accounting principles (GAAP), is a lack of recoverability of the net carrying amount. Once an asset is deemed to be impaired, its owner is charged with calculating a loss equal to the difference between the net carrying amount and the fair value of the asset.

Most businesses impair long-term, tangible assets. These impairments are addressed in FASB Statement No. 144: Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses applying goodwill allocation to long-term assets and creates a preferable method of estimating cash flow (probability-weighted) and when assets should be held for sale. (For related reading, see "Long-Term Asset Basics.")

Testing and Identifying

Tangible asset impairment might result from regulatory changes, technology changes, significant shifts in consumer preferences or community outlook, a change in the asset's usage rate, or other forecasts of long-term non-profitability. Intangible asset impairment isn't as clear. Many types of intangible assets are covered in FASB 144, and more are added by FASB 147, but the following thresholds do not necessarily hold for intangible assets.

It's often impractical to test every single asset for profitability in every accounting period. Instead, businesses should wait until an event or circumstantial change signals that a particular carrying amount might not be recoverable.

Types of Triggering Events

Some event-triggering thresholds are very easy to define and recognize. For instance, a business should test for impairment when accumulated costs are in excess of amounts originally expected to construct or acquire an asset. In other words, it's more expensive than once thought to obtain a business asset.

Other triggering events are correlative; an asset might be associated with a history of current period losses or operating cash flow losses. Maybe the asset shows a pattern of declining in market value.

There are also triggering events with vague descriptions. Adverse changes in legal factors or general economic conditions are both grounds for testing an impaired asset, despite a broad range of possible interpretations for adversity.

Determining Asset Impairment

Assets must be properly valued (fair value) in accordance with GAAP prior to testing. Groups of similar assets should be tested together, with the testing set at the lowest level of identifiable cash flows considered independent of other assets. Testing should fairly determine if the carrying amount exceeds undiscounted cash flows related to the use and disposal of the asset. If this can be demonstrated, the asset can be impaired and written down unless otherwise excluded by the IRS or GAAP.

(For more, see "How Is Impairment Loss Calculated?")

  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 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 >>
  3. What are the differences between amortization and impairment?

    Learn the differences between amortization and impairment as they relate to intangible assets held on a company's balance ... Read Answer >>
  4. How does goodwill amortize?

    Learn about the Financial Accounting Standards Board 's (FASB) rules for goodwill amortization, how the rules have changed ... Read Answer >>
  5. How do tangible and intangible assets differ?

    Tangible assets are physical assets that are used in a company's operations. Intangible assets are nonphysical, long-term ... Read Answer >>
  6. How do fixed assets and current assets differ?

    Current assets can be converted into cash in less than one year, while fixed assets are long-term physical assets. Read Answer >>
Related Articles
  1. Investing

    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

    Goodwill versus other intangible assets: What's the difference?

    "Intangible" assets don't possess physical substance. Yet they are quantifiable, and of great importance to any business.
  3. Investing

    How Does Goodwill Affect Stock Prices?

    Intangibles like goodwill have a role in stock prices, but just how much really?
  4. Investing

    Writing Down Goodwill

    An ill-fated acquisition of Hewlett-Packard's demonstrates what can happen when goodwill goes bad.
  5. Managing Wealth

    Comparing Tangible and Intangible Assets

    Tangible assets are physical assets such as land, vehicles or equipment.
  6. Investing

    GAAP And The IFRS Standards Convergence Efforts In 3 Substantial Areas

    Understand the specific steps that have been taken in hopes of converging the GAAP and the IFRS accounting standards, despite the philosophically and culturally based methodological differences ...
  7. Investing

    How to Evaluate a Company's Balance Sheet

    Asset performance shows how what a company owes and owns affects its investment quality.
  8. Small Business

    Your Business Could Ruin Your Investment Strategy

    It's important to properly value your business assets when managing your portfolio. Here's why.
  9. Investing

    Investment Value Vs. Fair Market Value

    Learn about the differences between an asset's investment value and its fair market value, including why many think fair market value is unrealistic.
  1. Impaired Asset

    An impaired asset is a company's asset that is worth less on ...
  2. Impaired Insurer

    An impaired insurer is an insurance company that may be unable ...
  3. Goodwill Impairment

    Goodwill impairment is goodwill that has become or is considered ...
  4. Historical Cost

    Historical cost is a measure of value used in accounting in which the ...
  5. Asset

    An asset is a resource with economic value that an individual ...
  6. Goodwill

    Goodwill is an intangible asset that arises as a result of the ...
Trading Center