Impairment of a fixed asset arises when the fair value of an asset suddenly drops below its recorded value. For you to account for fixed asset impairment, you should write off the difference between the recorded asset cost and its fair value. Note that some asset impairments can be so huge that they may result in significant decrease in the reported asset base and your business profitability (Also see Impairment versus Depreciation of Fixed Assets).
Impairment will only occur if the amount isn’t receivable or recoverable. This might happen when the book value is larger than the sum of undiscounted cash flows that your business expects from the asset over useful life and the expected gains when the asset will be disposed off. Since the asset’s disposal price is usually low, your business will obtain the bulk of the anticipated cash flow from the subsequent use of the asset.
As a business owner, you should assess your business assets regularly to figure out if any of your business assets needs to be impaired. The following are indicators that your business asset needs to be impaired.
- The asset’s physical condition has changed significantly
- Variation in the legal and economic factors
- Significant decrease in the asset’s market price
- There is projected and historical operating and cash flow loss associated with the asset.
- There is a high probability that the asset will be disposed before the end of its previously predicted useful life.
For you to understand fixed asset impairment, you should know the following terms.
Recoverable amount: this is the value of the economic benefits your business obtains from using or selling the fixed asset. It’s equivalent to the greater of the asset’s fair value less cost to sell or the asset’s value in use. Note that the asset’s value in use is the present value of all expected future cash flows associated with the asset.
Fair value less costs to sell: this is the current market value minus the expenses that will be incurred when you will be selling the asset.
After assessing your asset, you should only recognize the impairment loss whenever the recoverable amount is below the asset’s carrying amount. Financial Reporting Standards requires that the impairment loss should be recognized as an expense. However, if you had revalued the asset, you should recognize its impairment loss as a revaluation decrease. Don’t forget to do depreciation adjustments for future periods.
Accounting for assets impairment can be a complicated process. Therefore, if you aren’t familiar with the process, we strongly advise that you get help by engaging accounting services in Singapore.