A:

An accountant writes off an impaired asset by decreasing the book value of that asset on the company's balance sheet from its recorded cost to its fair value, assuming that the fair value of the asset has significantly declined below its recorded cost.

An impaired asset occurs when there is a sudden and irreversible drop in the fair value of an asset below its originally recorded cost. The impairment of an asset only occurs if the carrying amount of that asset is greater than the sum of undiscounted future cash flows generated from the asset over its remaining useful life – and that the value isn't recoverable.

When this occurs, the asset is considered to be impaired, and it must be written down. To do this, an accountant takes the impairment loss, which is the difference between the carrying value and the recently declined fair market value, and he subtracts it from the carrying value of that asset. The resulting value of the asset on the company's balance sheet is equal to the sharply declined fair market value of that asset.

To calculate the fair market value of the asset, an accountant needs to aggregate the undiscounted future cash flows that remain over the life of the asset. This decline in the value of the asset works to decrease the periodic depreciation expense that a company realizes and therefore the accumulated depreciation as well. This actually creates an increase in the company's net income slightly and also increases its taxes.

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. What is the difference between carrying value and market value?

    Understand the difference between carrying value and market value. Learn when a company uses carrying value to value an asset ... Read Answer >>
  4. How is market to market accounting different than historical cost accounting?

    Learn about historical cost accounting and mark to market accounting, the difference between and the limitations of the two ... Read Answer >>
  5. What are typical forms of capital assets within a manufacturing company?

    Learn the typical forms of capital assets for a manufacturing company, such as land, buildings, equipment, goodwill and trademarks. Read Answer >>
  6. What is the difference between book value and carrying value

    Dig deeper into the definitions of carrying value and book value, and learn to differentiate between their various financial ... 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

    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.
  3. Investing

    What's Fair Value?

    Fair value has three different meanings depending on the context.
  4. 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?
  5. 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.
  6. Investing

    Market value versus book value

    Understanding book value and market value is helpful in determining a stock's valuation and how the market views a company's growth prospects in the future.
  7. Investing

    Mark-To-Market: Tool Or Trouble?

    Mark-to-market accounting can be a valuable practice, but all bets are off when the market fluctuates wildly.
  8. Investing

    Accounting For Intercorporate Investments

    Understanding these investments is key to determining the value and future prospects of any business.
  9. Investing

    Depreciation: Straight-Line Vs. Double-Declining Methods

    Appreciate the different methods used to describe how book value is "used up".
  10. Managing Wealth

    Asset Manager Ethics: Valuation Is A Tricky Business

    Asset managers must accurately represent all of a clients assets in the client portfolio. This can be tricky for unique and hard-to-value assets.
RELATED TERMS
  1. Impaired Asset

    A company's asset that is worth less on the market than the value ...
  2. Impaired Capital

    Impaired capital is a condition where a company’s total capital ...
  3. Historical Cost

    A measure of value used in accounting in which the price of an ...
  4. Book Value Reduction

    A book value reduction takes place when writing down the value ...
  5. Goodwill Impairment

    Goodwill that has become or is considered to be of lower value ...
  6. Fair Value

    Fair value is the value of a company’s assets and liabilities ...
Hot Definitions
  1. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  2. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  3. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  4. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  5. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
  6. Hedge Fund

    A hedge fund is an aggressively managed portfolio of investments that uses leveraged, long, short and derivative positions.
Trading Center