Impairment of long-lived assets definition
/What is a Long-Lived Asset?
A long lived asset is any asset that a business expects to retain for at least one year. This definition can be broadened to include any asset that is expected to be retained for more than one accounting period. Long lived assets are usually classified into two subcategories, which tangible long-lived assets and intangible long-lived assets.
When to Recognize the Impairment of Long-Lived Assets
An impairment loss is recognized on a long-lived asset if its carrying amount is not recoverable and exceeds its fair value. The carrying amount is not recoverable when it exceeds the sum of the undiscounted cash flows expected to result from use of the asset over its remaining useful life and final disposition.
The amount of an impairment loss is the difference between an asset’s carrying amount and its fair value. Once an impairment loss is recognized, this reduces the carrying amount of the asset, so you should alter the amount of periodic depreciation being charged against the asset to adjust for this lower carrying amount. Otherwise, an excessively large depreciation expense will be incurred over the remaining useful life of the asset.
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How to Test for the Recoverability of an Impaired Asset
Only test for the recoverability of an asset when the circumstances indicate that its carrying amount may not be recoverable. Examples of such situations are:
Cash flow. There are historical and projected operating or cash flow losses associated with the asset.
Costs. There are excessive costs incurred to acquire or construct the asset.
Disposal. The asset is more than 50% likely to be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
Legal. There is a significant adverse change in legal factors or the business climate that could affect the asset’s value.
Market price. There is a significant decrease in the asset’s market price.
Usage. There is a significant adverse change in the asset’s manner of use or in its physical condition.
How to Allocate the Impairment of a Group of Assets
If there is an impairment at the level of an asset group, allocate the impairment among the assets in the group on a pro rata basis, based on the carrying amounts of the assets in the group. However, the impairment loss cannot reduce the carrying amount of an asset below its fair value.