Impairment (financial reporting)
Impairment of assets is the diminishing in quality, strength, amount, or value of an asset. An impairment cost must be included under expenses when the
History
Asset impairment was first addressed by the International Accounting Standards Board (IASB) in IAS 16, which became effective in 1983.[2] It was replaced by IAS 36, effective July 1999.[2]
In
The issue of impairment of financial assets exposed deficiencies in the IAS 36 framework during the
Scope
Impairment is discussed in several international accounting standards:[9]
Standard | Title |
---|---|
IAS 2 | Inventories |
IAS 4 | Insurance Contract assets |
IAS 5 | Non-current assets held for sale |
IAS 11 | Assets arising from construction contracts |
IAS 12 | Deferred tax assets |
IAS 19 | Assets arising from employee benefits |
IAS 36 | Impairment of assets |
IAS 39 | Financial assets |
IAS 40 | Investment property carried at fair value |
IAS 41 | Agricultural assets carried at fair value |
The FASB Accounting Standards Codification addresses impairment in the following sections:[10]
Section | Title |
---|---|
310 | Receivables |
320 | Investments |
323 | |
325 | |
330 | Inventories |
340 | Other Assets & Deferred Costs |
350 | Goodwill & Intangibles |
360 | Plant, Property & Equipment |
IAS 36 framework
Impairment is currently governed by IAS 36. The impairment cost is calculated using either the Incurred Loss Model or the Expected Loss Model.
Incurred Loss Model
An investment is recognized as impaired when there is no longer reasonable assurance that the future cash flows associated with it will be collected either in their entirety or when due. Entities look for evidence of situations that would indicate impairment. Such triggering events include when the entity[11] –
- is experiencing notable financial difficulties,
- has defaulted on or is late making interest payments or principal payments,
- is likely to undergo a major financial reorganization or enter bankruptcy, or
- is in a market that is experiencing significant negative economic change.
If such evidence exists, the next step is to estimate the recoverable amount of investments. The impairment cost would then be calculated as follows:
The carrying value is defined as the value of the asset appearing on the balance sheet. The recoverable amount is the higher of either the asset's future value[12] for the company or the amount it can be sold for, minus any transaction costs.[13][14]
Expected Loss Model
Estimates of
For example, assume a company has an investment in Company A bonds with a carrying amount of $37,500. If their market value falls to $33,000, an impairment loss of $4,500 is indicated and the impairment cost calculated as follows:
This is recorded as a loss of $4,500 in the income statement. Using the 'T' account system, there will be a debit in the Loss on Impairment account and a credit in the Investment account. This will mean the double-entry bookkeeping principle is satisfied.
Debit: Loss on Impairment $4,500
- Credit: Investment $4,500[15]
Effect on depreciation
To calculate depreciation on the asset, the new non-current asset value is considered. Continuing with the previous example and using the Straight line Depreciation method at say, 20%, depreciation would be:
The depreciation charge is smaller than if the original non-current asset value had been used.
Consequential asset value increases
Reversal of impairment losses is required for investments in
See also
References
- ^ McKaig, Thomas. "Understanding Impairment Accounting: What It Is and When It Is Used". qfinance.com. Bloomsbury Information Ltd. Archived from the original on October 28, 2011. Retrieved November 6, 2011.
- ^ a b Hamilton, Hyland & Dodd 2011, p. 57.
- ^ a b Hamilton, Hyland & Dodd 2011, p. 59.
- ^ EY 2014, p. 4.
- ^ a b EY 2014, p. 5.
- ^ EY 2014, p. 6.
- ^ EY 2014, p. 88.
- ^ "Project Update: Accounting for Financial Instruments—Credit Impairment". fasb.org. Financial Accounting Standards Board. May 20, 2015. Retrieved November 27, 2015.
- ^ Hamilton, Hyland & Dodd 2011, p. 56.
- ^ Hamilton, Hyland & Dodd 2011, p. 60.
- ISBN 978-0-470-16101-2.
- ^ "Recipe 5.16 Calculating Asset Appreciation (Future Value)". eTutorials.org. Retrieved April 3, 2013.
- ^ "IAS 36 — Impairment of Assets". IAS Plus. Deloitte. Retrieved April 3, 2013.
- ISBN 978-0-324-65913-9.
- ^ "Impairment of Fixed Assets". accountingexplained.com.
Further reading
- Hamilton, Kallie; Hyland, Brett; Dodd, James L. (2011). "Impairment: IASB-FASB Comparison" (PDF). Drake Management Review. 1 (1): 55–67.
- "IFRS in practice: IAS 36 Impairment of assets" (PDF). BDO International. December 2013.
- "Impairment of financial instruments under IFRS 9" (PDF). Ernst & Young. December 2014.