An impaired asset is an
asset
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
which has a market value less than the value listed on its owner's
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
.
According to U.S. accounting rules (known as
US GAAP), the value of an asset is impaired when the sum of estimated future
cash flows
A cash flow is a real or virtual movement of money:
*a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are expected ...
from that asset is less than its
book value
In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. T ...
. At this point an impairment loss should be recognized, which is done by taking the difference between the
fair market value
The fair market value of property is the price at which it would change hands between a willing and informed buyer and seller. The term is used throughout the Internal Revenue Code, as well as in bankruptcy laws, in many state laws, and by sever ...
(FMV) and the book value and recording this amount as the loss. This basically records the asset as if it were being acquired brand new at its FMV, recording this as its new book value.
[Albrecht, S., Stice, E., Stice, J., & Swain, M. (2011). ''Accounting: Concepts and applications'' (11th ed.). Mason: South-Western, p. 396–397] This is a common occurrence for
goodwill where a company will purchase a target company for more than the value of its net assets. Under US GAAP, goodwill is tested annually for impairment.
See also
*
Lower of cost or market Lower of cost or market (LCM or LOCOM) is a conservative approach to valuing and reporting inventory. Normally, ending inventory is stated at historical cost. However, there are times when the original cost of the ending inventory is greater than ...
References
{{reflist
United States Generally Accepted Accounting Principles
Asset