Controlling and Reporting of Real Assets
Overview of asset impairment recognition in accounting: when an asset’s value declines due to damage, market loss, or legal issues, a journal entry records the loss to reflect the asset’s reduced value. Key for reporting real assets like PPE.
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Boundless Accounting
Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources
Impairment o f Assets
Impairment Recognition
An impairment loss is recognized and accrued through a journal entry to record and reevaluate the asset's value.
Learning Objectives
Explain how to assess an asset for impairment
Key Takeaways
Key Points
Business assets should be tested for impairment when a situation occurs that causes the asset to lose value. Certain intangible assets, such as
goodwill, are tested for impairment on an annual basis.
Impairment losses can occur for a variety of reasons: physical damage to the asset, a permanent reduction in market value, legal issues against
the asset, and early asset disposal.
An impairment loss is recognized through a journal entry that debits Loss on Impairment, debits the asset's Accumulated Depreciation and
credits the Asset to reflect its new lower value.
Key Terms
accrue To increase, to augment; to come to by way of increase; t o arise or spring as a growth or result; to be added as increase, profit, or
damage, especially as the produce of money lent.
depreciation: The measurement of the decline in value of assets. Not to be confused with impairment, which is the measurement of the
unplanned, extraordinary decline in value of assets.
Impairment Recognition
Business assets should be tested for impairment when a situation occurs that causes the asset to lose value. An impairment loss is recognized
and accrued to record the asset's revaluation. Once an asset has been revalued, fluctuations in market value are calculated periodically. Certain
intangible assets, such as goodwill, are tested for impairment on an annual basis. Impairment losses can occur for a variety of reasons:
when an asset is badly damaged (negative change in physical condition)
the asset's market price has been significantly reduced
legal issues have had a negative impact on the asset
the asset is set for disposal before the end of its useful life A loss on impairment is recognized as a debit to Loss on Impairment {the difference
between the new fair market value and cu rrent book value of the asset) and a credit to the asset. The loss will reduce income in the income
statement and reduce total assets on the balance sheet.
Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources
Impairment o f Assets
Impairment Recognition
An impairment loss is recognized and accrued through a journal entry to record and reevaluate the asset's value.
Learning Objectives
Explain how to assess an asset for impairment
Key Takeaways
Key Points
Business assets should be tested for impairment when a situation occurs that causes the asset to lose value. Certain intangible assets, such as
goodwill, are tested for impairment on an annual basis.
Impairment losses can occur for a variety of reasons: physical damage to the asset, a permanent reduction in market value, legal issues against
the asset, and early asset disposal.
An impairment loss is recognized through a journal entry that debits Loss on Impairment, debits the asset's Accumulated Depreciation and
credits the Asset to reflect its new lower value.
Key Terms
accrue To increase, to augment; to come to by way of increase; t o arise or spring as a growth or result; to be added as increase, profit, or
damage, especially as the produce of money lent.
depreciation: The measurement of the decline in value of assets. Not to be confused with impairment, which is the measurement of the
unplanned, extraordinary decline in value of assets.
Impairment Recognition
Business assets should be tested for impairment when a situation occurs that causes the asset to lose value. An impairment loss is recognized
and accrued to record the asset's revaluation. Once an asset has been revalued, fluctuations in market value are calculated periodically. Certain
intangible assets, such as goodwill, are tested for impairment on an annual basis. Impairment losses can occur for a variety of reasons:
when an asset is badly damaged (negative change in physical condition)
the asset's market price has been significantly reduced
legal issues have had a negative impact on the asset
the asset is set for disposal before the end of its useful life A loss on impairment is recognized as a debit to Loss on Impairment {the difference
between the new fair market value and cu rrent book value of the asset) and a credit to the asset. The loss will reduce income in the income
statement and reduce total assets on the balance sheet.
A loss o n impairment is recognized as a debit t o Loss o n Impairment (the difference between the new fair market value and current book value of
the asset) and a credit t o the asset.The loss will reduce income in the income statement and reduce total assets o n the balance sheet.
The impairment of an asset reduces its value on the balance sheet.: The cost o f an impaired building beyond repair is disclosed as a loss on
the income statement.
For an example., take a retail store that is recorded on the owner's balance sheet as a non-current asset worth USD 20,000 (book value or carrying
value is USD 20,000). Based o n t h e asset's book value, assume the store has a historical cost of USD 25,000 and accumulated depreciation of USD
5,000. A hurricane sweeps through the town and damages the store's building. After assessing the amount o f the damage, the owner calculates
that t h e building's market value has fallen to USD 12,000.
The Loss on Impairment is calculated t o be USD 8,000 (20,000 book value - 12,000 market value)
The journal entry t o recognize the Loss o n Impairment:
Debit Loss o n Impairment for USD 8,000
Debit Store Building-Accumulated Depreciation for USD 5,000
Credit Store Building f o r USD 13,000
The Loss on Impairment for USD 8,000 is recognized on the income statement as a reduction t o the period's income and the asset Store Building
is recognized at its reduced value of USD 12,000 o n the balance sheet (25,000 historical cost - 8,000 impairment loss - 5,000 accumulated
depreciation). After the impairment, depreciation expense is calculated using the asset's new value.
the asset) and a credit t o the asset.The loss will reduce income in the income statement and reduce total assets o n the balance sheet.
The impairment of an asset reduces its value on the balance sheet.: The cost o f an impaired building beyond repair is disclosed as a loss on
the income statement.
For an example., take a retail store that is recorded on the owner's balance sheet as a non-current asset worth USD 20,000 (book value or carrying
value is USD 20,000). Based o n t h e asset's book value, assume the store has a historical cost of USD 25,000 and accumulated depreciation of USD
5,000. A hurricane sweeps through the town and damages the store's building. After assessing the amount o f the damage, the owner calculates
that t h e building's market value has fallen to USD 12,000.
The Loss on Impairment is calculated t o be USD 8,000 (20,000 book value - 12,000 market value)
The journal entry t o recognize the Loss o n Impairment:
Debit Loss o n Impairment for USD 8,000
Debit Store Building-Accumulated Depreciation for USD 5,000
Credit Store Building f o r USD 13,000
The Loss on Impairment for USD 8,000 is recognized on the income statement as a reduction t o the period's income and the asset Store Building
is recognized at its reduced value of USD 12,000 o n the balance sheet (25,000 historical cost - 8,000 impairment loss - 5,000 accumulated
depreciation). After the impairment, depreciation expense is calculated using the asset's new value.
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Accounting