Impairment on Long Lived Assets

[yickwong]

Could someone please help me out on how this thing works? So I know that impairment is recorded on an asset where it's carrying value is lower than the fair value (the sum of expected cash flows right?)
Also, how is it usually recorded? is it entered into the accounts like you do for depreciation?
And how does the stuff in reading 43 part 4 work? Specifically:
-for impairments of assets held for sale does that mean we record the disposed asset's
value at the value after impairment? (instead of just the carrying value)

-When do we use the 2 impairment tests? Is it done everytime a statement is prepared?


Thanks for the help!



Edited 2 time(s). Last edit at Sunday, June 17, 2007 at 06:08AM by yickwong.

 

[hiredguns1]

yickwong, if I remember correctly:
The test for impairment must be conducted at least annually (events may transpire during the year that warrant an impairment test). The carrying value of the asset is compared against the (undiscounted) expected future cash flows to be generated by the asset. If carrying value exceeds the sum of these undiscounted cash flows, the asset is impaired.
Now, the actual value of the impairment is the difference between the carrying value of the asset and the present value (i.e. discounted) expected future cash flows to be generated by the asset.
The value of the impairment is charged against earnings (in unusual/infrequent items I think).
The carrying value of the asset is reduced by the value of the impairment, and carried at that value thereafter (it cannot be written-up under GAAP if for some reason its value increases, but can be further impaired).
Note that while earnings in the current year will be reduced by the impairment, they may be increased in future years due to the reduced depreciation expense stemming from the impaired asset. Hence, impairments are an avenue for earnings manipulation and should be scrutenized by the analyst.
Just my $0.02.

 

[yickwong]

Thanks this clears it up a lot! I spent ages trying to put it into perspective about how it fits in.
What is the reasoning behind comparing it against undiscounted cash flows? Is it some sort of more conservative practice?

 

[hiredguns1]

yickwong, I don't know the reasoning for this method, but it seems like a decent compromise: Be more conservative for the impairment test itself, but more costly in calculating the actual value of the impairment. Might need a CPA to elaborate. Good luck on your upcoming exam.