An impaired asset is an
asset which has a market value less than the value listed on its owner's
balance sheet.
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. At this point an impairment loss should be recognized, which is done by taking the difference between the
fair market value (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 t ...
References
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United States Generally Accepted Accounting Principles
Asset