A long-lived asset has become impaired when the book value of the asset as recorded on the balance sheet is not expected to be recovered during future operations.

Example

A call center operator recently capitalized a $2 million investment in production fixtures at a leased building.  The call center company’s primary client in this site cancels the existing business contract two months after the investment is made.  The call center firm’s capitalized assets associated with this building may have become impaired, if the company feels that it cannot place new business in this site and must cease operations there.

Events that may cause a “lack of asset value recoverability” could be:

• A decrease in the asset’s market value.
• Adverse changes in the law.
• Adverse changes in the business climate involving the asset.
• Cost overruns on a project associated with the asset.
• The experience or anticipation ofincome statement or cash flow losses associated with the asset.

Both IFRS and US GAAP require impaired assets to be written down and losses recognized in the income statement. However, there are some differences.

 Types of Asset Impairment

• Write-downs– Asset values have changed as a result of changing market conditions.
• Restructurings – Asset value declines associated with the re-organization of business operations.

The US approach to impairment of long-lived assets has flaws because company management retains the ability to determine the assumptions, which go into performing a recoverability test.

In a period of economic recession, an analyst should be suspicious of a firm that does not experience any asset impairment, as management may be sticking to older, more optimistic assumptions about the expected future cash flows generated by its assets.

Intangible Assets with Indefinite Lives

These assets are not amortized but tested for impairment at least annually.

If carrying value exceeds fair value, assets are written down in balance sheet and a loss is recognized in income statement.

Long-lived Assets Held for Sale

The assets held-for-sale are impaired if their carrying value exceeds net realizable value. If carrying value exceeds net realizable value, assets are written down in balance sheet and a loss is recognized in income statement.

Under both IFRS and US GAAP, loss can be reversed if asset value recovers. Loss reversal is limited to original impairment loss.