Accounting – Impairment versus Depreciation of Fixed Assets
Impairment of an asset emerges when the fair value of an asset unexpectedly goes down below its value while depreciation is the decrease in the value of an asset gradually so what is the difference between the two?
First of all, impairment can happen in wider asset classes than depreciation does. For instance, impairment can happen on goodwill, receivables, investments as well as plant and equipment. Depreciation on the other hand normally only occur on plant and equipment.
Secondly, impairment occurs when:
- The asset’s physical condition has changed dramatically
- Variant in the technical, environmental and economic aspects
- Considerable reduction in the asset’s market value
- There is forecasted as well as historic operating as well as capital loss connected with the asset
These are normally actual conditions that adversely affecting the assets’ value, whether it is internally or externally.
With the consideration of deterioration (assets end up being worn with usage) and obsolescence (the worth of particular assets have actually lowered due to the fact that brand-new, a lot more reliable modern technology has been created), it is more wise to first allocate the cost of the asset over time instead of charging the entire amount in the year of purchase.
In other words, depreciation is the attempt to match the cost to the revenue by allocating the cost of the assets to different financial period and it has totally nothing to do with the condition, be it internal or external, of the assets.
Differentiating the two can be a complicated process, even to an accountant sometimes. Therefore, if you aren’t familiar with the process, we strongly advise that you engage an accounting service in Singapore to alleviate your burden.