From the course: Accounting Foundations: Asset Impairment
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The strange tangible asset impairment test in US GAAP
From the course: Accounting Foundations: Asset Impairment
The strange tangible asset impairment test in US GAAP
- When a long-term tangible operating asset suffers a significant and permanent decline in value, it's said to be impaired. When an asset is impaired, its recorded value is reduced and an impairment loss is recognized. According to US accounting rules, determining whether an impairment loss exists and then calculating the amount of the loss involves a two-step process, and this is a strange process so watch carefully. First, the recorded book value of the asset is compared with the sum of the future cash flows to be generated by the asset. Second, if the future cash flows are lower, a loss is recognized. The amount of the loss is the difference between the book value of the asset and its market value. Now that doesn't seem so strange until we look closely at the first step. The sum of the future cash flows to be generated by an asset is a strange number. To illustrate, let's use an extreme example. An asset that is…
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