Saturday Brain Storming Thought (128) 28/08/2021
COMPILED BY ER. AVINASH KULKARNI
IMPAIRED ASSET
An impaired asset is an asset valued at less than book value or net carrying value
ie an impaired asset has a current market value that is less the value listed on the balance sheet
To account for the loss, the company’s balance sheet must be updated to reflect the assets new diminished value
Keynotes for impaired asset
1) assets should be regularly evaluated for impairment to prevent overvaluation on the balance sheet
2) assets most likely to become impaired include accounts receivable and long-term assets
3) a loss due to an asset impairment is recorded on both the balance sheet and the income statement
4) asset impairment occurs when the net carrying amount or book value cannot be recovered by the owner
5) asset impairment can occur from a one-time incident or a succession of events
6) company must reflect the assets diminished value in its financial statements
Occurrence of the impaired asset
1) when the value of assets acquired through a merger or acquisition has been overstated by the seller
2) when a collection of accounts receivable becomes unlikely
Impairment loss
The amount by which carrying amount of an asset or cash-generating unit exceeds its the recoverable amount
Carrying amount
The amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment losses thereon
Recoverable amount
The amount which is expected to be recovered by use or sale of the asset, whichever is higher
Recoverable amount = fair value – disposal cost
Recoverable amount = value in use
Fair Value
It is the price that would be received to sell an asset
Costs to sell
It includes legal costs to selling and direct incremental costs ie necessary costs required for asset selling
Indicators of Impairments
1) External factors
a) significant decline in the market value of the asset
b) changes in a technological environment
c) changes in a legal environment
2) Internal Factors
a) physical damage of obsolescence of the asset
b) significant changes have taken place or are likely to take place which has an adverse effect on the entity or the manner of using the assets
Reversal of impairment loss
1) impairment loss recognized in prior years should be reversed if there is an indication that such losses do not exist any long
2) reversal amount should be limited to earlier impairment losses recognized
Accounting treatment of reversal of impairment loss
1) goodwill impairment loss will not be recovered
2) revalued assets reversal will be treated as a revaluation increase
3) other assets reversal will be recognized in the profit and loss account immediately
4) further depreciation will be charged on the revised carrying amount
Cash generating unit (CGU)
This represents the smallest identifiable group of assets that generates cash flows that are largely independent of cash flows from other assets or group of assets
Advantages of impaired assets
1) analysts and investors can make good decisions
2) many business failures are heralded by a fall in the impairment value of assets
3) such disclosures act as early warning signals to creditors and investors
Disadvantages of impaired assets
1) quite difficult to determine the measure of value which should be used while assessing an impairment
2) difficult when to recognize impairment
3) difficult to measure impairment
4) difficult to disclose impairment
Financial assets subject to impairment
1) those measured at amortized cost and at fair value through other comprehensive income
2) lease receivables
3) contract assets
4) irrevocable loan commitments
5) financial guarantee contracts that are not accounted for at fair value through profit or loss
Compiled by:-
Er. Avinash Kulkarni
Chartered Engineer
Govt Regd Valuer
IBBI Regd Valuer
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