What Is an Impaired Asset?

In the United States, assets are considered impaired when the book value, or net carrying value, exceeds expected future cash flows. This occurs if a business spends money on an asset, but changing circumstances caused the purchase to become a net loss.

Several acceptable testing methods can identify impaired assets. If the impairment is permanent, the company should use an allowable method to measure impairment loss so that it is reflected in the company’s financial statements.

Understanding Impaired Assets

Impairment recognition and measurement are jointly regulated by the Internal Revenue Service (IRS), the Financial Accounting Standards Board (FASB), and the Governmental Accounting Standards Board (GASB).

The general threshold for impairment, as described under generally accepted accounting principles (GAAP), is a lack of recoverability of the net carrying amount. Once an asset is deemed to be impaired, its owner is charged with calculating a loss equal to the difference between the net carrying amount and the fair value of the asset.

Most businesses impair long-term, tangible assets. These impairments are addressed in FASB Statement No. 144: Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses the application of goodwill allocation to long-term assets and suggests a preferable method for estimating cash flow (probability-weighted) and when assets should be held for sale.

Testing and Identifying

Tangible asset impairment might result from regulatory changes, technology changes, significant shifts in consumer preferences or community outlook, a change in the asset’s usage rate, or other forecasts of long-term non-profitability. Intangible asset impairment is less clear. Many types of intangible assets are covered in FASB 144, and more are added by FASB 147, but the following thresholds do not necessarily hold for intangible assets.

It is often impractical to test every single asset for profitability in every accounting period. Instead, businesses should wait until an event or circumstantial change signals that a particular carrying amount might not be recoverable.

Types of Triggering Events

Some event-triggering thresholds are easy to define and recognize. For instance, a business should test for impairment when accumulated costs are in excess of amounts originally expected to construct or acquire an asset. In other words, it is more expensive than once thought to obtain a business asset.

Other triggering events are correlative; an asset might be associated with a history of current period losses or operating cash flow losses. Perhaps the asset shows a pattern of declining market value.

There are also triggering events with vague descriptions. Adverse changes in legal factors or general economic conditions are both grounds for testing an impaired asset despite a broad range of possible interpretations for adversity.

Determining Asset Impairment

Assets must be properly valued (fair value) in accordance with GAAP prior to testing. Groups of similar assets should be tested together, with the testing set at the lowest level of identifiable cash flows considered independent of other assets. Testing should fairly determine if the carrying amount exceeds undiscounted cash flows related to the use and disposal of the asset. If this can be demonstrated, the asset can be impaired and written down unless otherwise excluded by the Internal Revenue Service or GAAP.