What is an Impaired Asset?

An impaired asset is one that has a book value less than its market value. Fixed assets and goodwill are the assets most commonly experiencing impairment write downs. Impairment testing is to be conducted at regular intervals, so a business could experience a series of impairment charges against a single asset.

Characteristics of an Impaired Asset

The key characteristics of an impaired asset are as follows:

Fair value is less than carrying amount. The fair value of the asset has dropped significantly below its carrying amount (book value). This can result from market conditions, obsolescence, or damage to the asset.
Negative cash flows or losses. The asset or the cash-generating unit (CGU) it belongs to is unable to generate enough cash flow to recover its book value.

Accounting for an Impaired Asset

When an asset is impaired, you should reduce the book value of the asset to its market value, which creates a loss in the amount of the difference. This loss should be recognized at once, rather than being spread over an extended period of time. In addition, you will need to alter the periodic depreciation charge of the impaired asset, since it now has a much-reduced book value that requires substantially less depreciation.

Impact of Depreciation on Asset Impairment

When an asset is being depreciated on an accelerated basis, it is less likely that the asset will be judged to be impaired. The reason is that the ongoing depreciation charges reduce its net book value so quickly that a decline in its market value will rarely drop below its remaining book value.