In financial accounting, an impairment of a fixed asset occurs when an asset’s fair value falls below its recorded value all of a sudden. If you want to calculate impairment of fixed asset, you have to work out the difference between the value of the recorded asset and its fair value. Keep in mind that some impairment of the asset may be so huge that they might cause a substantial drop in the reported asset base and the profitability of your business (Also see Differences Between Investment and Custodial Accounting).
The impairment will happen only when the amount is not recoverable or receivable. This might occur when the book value is greater than the total of undiscounted cash flows which your company predicts to get from the asset over its useful life as well as the predicted profit when you dispose of the asset.
As an entrepreneur, you should regularly evaluate the assets that your company possesses to identify if some of your company assets have to be impaired in the Balance Sheet (Also see What is Balance Sheet and Statement of Affairs?). If the following happens, the impairment of assets of your business will occur.
- There is a significant change in the asset’s physical state
- There is a variation in the economics and legal aspects
- There is a substantial drop in the market price of the asset
- There is an expected and prior operating and cash flow loss related to the asset
- The asset is most likely to be disposed of before its expected useful life ends
If you want to know more about the impairment of fixed asset, you need to understand the terms below.
Fair value less costs to sell (FVLCS): You get to know this value by calculating the difference between the present market value and the expenditures that are going to be incurred when you sell the asset.
Recoverable amount: The recoverable amount is the value of the financial benefits your company will get when you utilize or sell the fixed asset. It is equal to the increase of the ‘fair value less cost to sell’ or the value in use of the asset. Keep in mind that the value in use of the asset is the current value of all anticipated cash flows related to the asset in the future.
After you evaluate your assets, you should acknowledge the impairment loss only when the recoverable amount is lower than the carrying amount of the asset. Usually, the Financial Reporting Standards requires you to identify the impairment loss as an expenditure (Also see Employ Accounting Service To Prepare Financial Statements). Nevertheless, you must identify its impairment loss as a revaluation decrease if you had carried out a revaluation of the asset. Keep in mind to complete depreciation adjustments in the future.
Accounting for impairment of fixed assets may be a challenging procedure. Hence, we suggest you get assistance by employing an accounting service Singapore if you are unfamiliar with such tasks.