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What Is an Impaired Asset and How Should You Deal with It?

By Analytix Editorial Team

December 17, 2021 0 Comments
What Is An Impaired Asset and How Should You Deal with It?

Given the long-reaching effects of COVID-19 and the existing pandemic landscape, many businesses have struggled with sustainability. A Mondaq report dated September 2021 reports findings that the volatility and uncertainty associated with COVID-19 had a significant impact on asset valuation, contributing to a “staggering $518 billion in total impairments disclosed in 2020.”

An impaired asset no longer carries the same market value as what is listed in the records of a business. Because its value is now reduced, the impaired asset is recorded as a loss in the business balance sheet.

An asset is impaired when certain factors cause it to lose its value:

  • Any negative influence, resulting in physical changes that cause the asset to downgrade and no longer carry the original value.
  • A legal change in its market value, causing a downgrade in price and valuation.
  • Factors leading to asset disposal before the planned disposal date. These factors can lead to a downgrade in value causing the asset to be impaired for the purpose of balance sheet records.

An example of an asset that can be impaired is a fixed asset such as property or equipment needed to operate the business. Assets that can be impaired may also be intangible, such as the goodwill enjoyed by a business, accounts receivable, or dues that are owed to the company by its customers.

Dealing with an Impaired Asset

Most businesses expect asset value to be dynamic and move according to market fluctuations. When the value of the asset goes below its original costs and no recovery is expected ahead, it is considered an impaired asset.

Current market value of the impaired asset should be recorded down in the business balance sheets. The impaired value is seen as a loss in the finances of the business, especially as part of the income statement. One of the ways to deal with an impaired asset is to determine what caused the impairment and led to the loss of value. There are several factors that can cause impairment:

  • Changes, specifically negative changes, in market conditions, including sudden economic downturns.
  • In the case of physical and material assets such as a building or premises, physical conditions that cause it to deteriorate. For example, a flood or earthquake that may cause permanent damage.
  • Decrease in the functionality of the asset.
  • Emergence of newer trends, technologies, and practices that may outdate the asset.

For an ambitious and growth-oriented business, it is important to understand the implications of asset impairment loss, particularly since an increase in losses has a direct negative effect on the business bottom line.

A silver lining

Asset impairment losses recorded in an income statement may be reversed if the asset regains value. Unfortunately, this is most often a rare circumstance and requires careful scrutiny of the market and of factors influencing the asset. It is important to understand why the value would revert or improve after registering downgrades. It is also important to note that impairment in certain assets, such as the business brand name and association, and goodwill, cannot be reversed.

In terms of financial management, professional assistance can help small to mid-sized businesses understand accounting and the implications of bookkeeping and accounting practices. Professional expertise can provide great value in tracking income, profits, and losses. This can include regular examination of the business assets to check the current condition, influencing factors, and results of any market volatility. This can help pre-empt chances of impairment, allowing the business to undertake corrective measures.

Professional bookkeeping services can help small businesses, particularly resources-challenged ones, from suffering losses due to inadvertent disregard of regular accounting best practices.

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