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Impairment loss is the decrease in an asset’s net carrying value that exceeds the future undisclosed cash flow it should generate. Net carrying value is an asset’s acquisition cost minus depreciation.

Impairment occurs when a company sells or abandons an asset that is no longer beneficial. Impaired assets must be recognized as a loss on the company’s income statement.

To calculate impairment loss, first identify the factors that lead to the asset’s impairment. They could include changes in market conditions, new legislation, turnover in the workforce, or the asset simply became too old or outdated.

Then estimate the asset’s fair market value, which is the price it would fetch if it were sold on the market.  Some call this the asset’s recoverable amount, or the future cash flow it would generate if it continued to work.

Once fair market value is assigned, compare it to the carrying value of the asset that’s listed on the business’s financial statement. If the cost of holding the asset exceeds its fair market value, the asset is impaired.

Even when impairment creates a tax benefit, it’s bad for a company. It usually signals an increased need for reinvestment.

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