Reviewed by Oct 05, 2020| Updated on
An impaired asset is one with a market value less than the value listed on a company's balance sheet. If an asset's projected future cash flow is expected to be less than its current carrying value, then the asset is said to be impaired.
When an asset is said to have an impaired value, it must be written down to the current market value on the company's balance sheet. Asset impairment may occur due to adverse changes in legal factors that may have changed the asset value, changes in asset's market price due to change in consumer demand, or due to physical damage to the asset.
The potential impairment may also occur if the asset is disposed of earlier than the expected disposal date. Examples of asset accounts that are likely to become impaired are goodwill, accounts receivable, and fixed assets.
Assets are regularly tested for impairment so that the company's total asset value is not diminished or overstated in the balance sheet. Assets, such as goodwill must be tested on an annual basis, as stated by the generally accepted accounting principles (GAAP).
It also suggests the companies consider economic conditions and other events that occur between two annual impairment tests to determine if they negatively impact the market value of an asset pushing it below the carrying value. They are recorded in the company's income statement only if the predicted future cash flow is unrecoverable.
In accounting, the impaired asset is recorded as a debit to a loss or expense, account and a credit to the related asset. A contra asset impairment account is used to hold the balance opposite of the associated asset account. The net of the asset, accumulated depreciation, and the contra asset impairment account denote the new carrying cost.
Once the impairment is recorded, the asset will have a reduced carrying cost. The asset will be reported at lower carrying costs in the future.