Disclosure should include a description of the impaired asset, reasons for the
impairment, a description of the
measurement assumptions, and the
business segment or segments affected.
Accounting for Asset Impairment
• Guangzhou Company purchased a building five
years ago for $600,000. It has an expected life of 20 years (zero residual value) and has a book value of
$450,000 (using straight-line depreciation).
• Guangzhou estimates that the building has a
remaining useful life of 15 years. Net cash inflow
from the building is expected to be $25,000 per year, and the fair value of the building is $230,000.
Accounting for Asset Impairment
• The $450,000 book value is compared to the
$375,000 ($25,000 × 15 years) undiscounted future cash flows. An impairment loss should be
recognized. The loss is $220,000 ($450,000 –
$230,000). The impairment loss would be recorded as follows:
Accumulated Depreciation—Building 150,000 Loss on Impairment of Building 220,000
Accounting for Asset Impairment
Using the Guangzhou Company example,
assume that after five years the fair market value is $540,000. Guangzhou elects to employ IAS 16.
A journal entry is needed to recognize the asset revaluation.
Accumulated Depreciation—Building 150,000 Revaluation Equity Reserve
90,000
Building ($600,000 − $540,000)
International Accounting for Asset Impairment: IAS 16
Immediately after revaluing the building to
$540,000, Guangzhou Company sells it for
$540,000 in cash. The disposal would be recorded as follows:
Recording the Disposal of Revalued Asset
Cash 540,000
Building 540,000
Revaluation Equity Reserve 90,000
Retained Earnings 90,000
• Intangible assets are to be amortized by the straight-line method unless there is strong justification for using another method.
• Because companies must disclose both the
original cost and the accumulated amortization for an amortizable intangible, the credit should be to a separate accumulated amortization
account.
Amortization and Impairment of Intangible Assets
Ethereal Company purchased a customer list for
$30,000 on January 1, 2011. It is expected to have economic value for four years. The expected
residual value is zero. On December 31, 2011, the following journal entry is made to recognize
amortization expense:
Amortization Expense 7,500
Amortization and Impairment of Intangible Assets
On December 31, 2012, before the amortization entry is made, a test for impairment is made. The future cash flow of the list is expected to be $15,000—which is less than the book value of $22,500 ($30,000 – $7,500). The amount of the impairment loss is $10,500 ($22,500 – $12,000).
Impairment Loss 10,500
Accumulated Amortization—
Customer List 7,500
Customer List 18,000
Amortization and Impairment of Intangible Assets
Impairment of Intangibles Not Subject to Amortization
SFAS No. 142 describes the following examples of intangibles with indefinite lives:
• Broadcast licenses often have a renewal period of ten years. Because renewal is virtually automatic, such licenses are considered to have an indefinite life.
• A trademark right is granted for a limited time, but can be renewed almost routinely. As long as the trademark is useful, it has an indefinite life.
• Impalable Company has a broadcast license that has no foreseeable end to its useful life. The
license cost $60,000, and it was estimated that the license generated cash flows of $7,000 per year.
• Recent events have convinced management that the cash flow will be reduced. The weighted
probability shows that the estimated fair value is
$52,000.
Impairment of Intangibles Not Subject to Amortization
Impairment of Intangibles Not Subject to Amortization
Because the estimated fair value is less than the book value ($52,000 < $60,000), the
intangible asset is impaired. The loss is
recognized with the following journal entry:
Impairment Loss ($60,000 − $52,000) 8,000
Broadcast License
8,000
Procedures in Testing Goodwill for Impairment
1. Compute the fair value of each reporting unit to which goodwill has been assigned.
2. If the fair value of the reporting unit exceeds the net book value of the assets and liabilities of the reporting unit, the goodwill is assumed to not be impaired and no impairment is recognized.
3. If the fair value of the reporting unit is less than the net book value of the assets and liabilities of the reporting unit, then a new fair value of
goodwill is computed. Goodwill value is always a residual value.
4. If the implied amount of goodwill computed in (3) is less than the amount initially recorded, a goodwill impairment loss is recognized for the
Procedures in Testing Goodwill for Impairment
Asset Retirement by Sale
On July 1, 2011, Landon Supply Co. sells for $43,600 machinery that is recorded on the books at a cost of
$83,600 with accumulated depreciation as of January 1, 2011, of $50,600. Assume a 10 percent straight-line
rate.
Depreciation Expense—Machinery 4,180 Accumulated Depreciation—
Machinery
4,180 ($83,600 × 0.10 × 6/12)
Asset Retirement by Sale
On July 1, 2011, Landon Supply Co. sells for $43,600 machinery that is recorded on the books at a cost of $83,600 with
accumulated depreciation as of January 1, 2011, of $50,600.
Assume a 10 percent straight-line rate. An entry for $4,180 would be made for depreciation from January to June ($83,600 × 0.10 × 1/2), then the retirement is recorded.
Cash 43,600
Accumulated Depreciation—Machinery 54,780 Machinery
Asset Classified as Held for Sale
• Management commits to a plan to sell a long- term operating asset.
• The asset is available for immediate sale.
• An active effort to locate a buyer is underway.
• It is probable that the sale will be completed within one year.
Special accounting is required if the following conditions are satisfied:
If the criteria are satisfied, two uncommon
accounting actions are required. During the interval between being classified as held for sale and
actually being sold: