An impairment loss should be recognized on a long-lived asset if its carrying amount is not recoverable and exceeds its fair value. This loss is recognized within income from continuing operations on the income statement.
The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset over its remaining useful life and the final disposition of the asset. These cash flow estimates should incorporate assumptions that are reasonable in relation to the assumptions the entity uses for its budgets, forecasts, and so forth.
The amount of an impairment loss is the difference between an asset’s carrying amount and its fair value. Once an impairment loss is recognized, this reduces the carrying amount of the asset, so it may be necessary to alter the amount of periodic depreciation being charged against the asset to adjust for this lower carrying amount. Otherwise, an excessively large depreciation expense will be incurred over the remaining useful life of the asset.
Only test for the recoverability of an asset whenever the circumstances indicate that its carrying amount may not be recoverable. Examples of such situations are:
- Cash flow. There are historical and projected operating or cash flow losses associated with the asset.
- Costs. There are excessive costs incurred to acquire or construct the asset.
- Disposal. The asset is more than 50% likely to be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
- Legal. There is a significant adverse change in legal factors or the business climate that could affect the asset’s value.
- Market price. There is a significant decrease in the asset’s market price.
- Usage. There is a significant adverse change in the asset’s manner of use, or in its physical condition.
If there is an impairment at the level of an asset group, allocate the impairment among the assets in the group on a pro rata basis, based on the carrying amounts of the assets in the group. However, the impairment loss cannot reduce the carrying amount of an asset below its fair value.