What is the concept of impairment of long-lived assets in accounting?

by josie_rohan , in category: Taxation and Accounting , a year ago

What is the concept of impairment of long-lived assets in accounting?

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1 answer


by olen , a year ago


Impairment of long-lived assets refers to the reduction in the value of an asset when its carrying amount exceeds its recoverable amount. In accounting, long-lived assets, also called non-current assets, include property, plant, and equipment, intangible assets, and goodwill.

The concept of impairment recognizes that long-lived assets may not generate the expected future cash flows due to various factors such as technological changes, changes in market conditions, legal changes, or poor asset performance. When the carrying value of an asset is no longer recoverable or cannot be justified, impairment needs to be recognized in the financial statements.

To test for impairment, an entity compares the carrying amount of the asset with its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs of disposal (market value) and its value in use (the present value of expected future cash flows generated by the asset). If the carrying amount is higher than the recoverable amount, an impairment loss is recognized.

Once impairment is recognized, the carrying amount of the asset is reduced to its recoverable amount, and the impairment loss is recognized as an expense in the income statement. This reduces the asset's value on the balance sheet and can have a negative impact on the entity's profitability, financial ratios, and overall financial position.

Impairment testing is typically done annually, but if any events or changes in circumstances indicate a potential impairment, testing should be performed more frequently. Regular impairment assessments ensure that the values of long-lived assets are fairly stated and reflect their current economic value.