Impairment loss means when there is a decrement in the net carrying value of an asset, and then the acquisition cost the asset minus depreciation, of the asset which is greater than the potential cash flow of the same asset. This situation arises when the company decides to sold the asset because it is expected that the asset no longer give any benefit to perform the operations to the same. This process does not take place through write down depreciation method but by an impairment loss that results in a tax benefit for the asset. Many times, the stockholders of public company lose their equity in their share. This situation depends upon type of asset that is being impaired. It results in lower debt to equity ratio for the company (Liu, 2013).
The first step to calculate the impairment loss is to identify all the factors due to which the impairment of the assets takes place (Investopedia, 2014). Certain factors that results in impairment of the loss are-
Conditions in the market- It refers to the market situation present there that directly or indirectly affects the working of the firm. It also represents the characteristic of the market which creates an impact on the assets of the firm. It can be customers, competitors growth of the other companies, etc (Stoia-Djeska and Frunzulica, 2015).
New rules and regulations by the government- Many times government imposed such laws that affect the value of the asset of an organization. Such rules and regulation passed by the government act as a barrier to the company’s asset.
Enforcement in regulatory- There are some specified polices passed by the government that is enforceable by the law. Such regulatory may or may not be beneficial for the company and its assets.
Turnover of the workforce- Employees turnover means the percentage and amount of the employees who left or leave the organization due to some personal reasons or benefits and that position is replaced by other employees. There is a need to measure the percentage of the employee turnover rate for an organization to controls it as it affects the budget of the company.
Decrease in the functions of assets- Many times, the value o the assets decrease because there is no issue of the asset or it becomes obsolete. It happens when there are many assts in the oraganisation or the asset is of no more use for the employees.
Aging of assets- When the asset becomes old and it s not giving any type of benefits to the organization then it will be sold by the company (Pavliková and Kralik, 2014).
Updated technology- It is one of the most crucial reason due to which the assets and their value become negligible. Whether the asset is old or not, due to new technology, it value is decreased. Up gradation in the technology is important too because no company can grow without innovation and up gradation (Changsheng and Yongfeng, 2012).
The fair market valuation is the key to calculate impairment loss. It cannot be recognized without a good or exact fair market value. It should not be the approx value also. Fair market value refers to the reasonable, correct and fair price of the asset if it will sod to the market it is also known as the future cash flow generated by the asset if the organization will continue the business operation with that asset. There is one more term to address this i.e., recoverable amount (Martin, 2010). Once, the calculation for the fair market value is calculated then it will be compare by the carrying value of that asset that written on the financial statement of the organization. There is no need to recalculate the carrying value of the asset as it already exists in the previous records of accounting. If the cost of the holding of the assets that is calculated by the company is more than the calculated fair market value of that asset, than it is considered as an impaired asset. If the asset in doubt is going to be set off, than the cost related with the set off asset must be added to the net of the potential net values less the carrying value of the asset.
There are two methods by which impairment a loss is being calculated. The methods are- the revaluation model of impairment or the cost model of impairment. The calculation of impairment and the models that will use to calculate the impairment depending on whether the amount of the debit will change or vary by the new ad adjusted fair market valuation that is described above. Sometimes the impairment results in the tax benefit for the company. But for the longer period of time it results as a negative aspect for the organization as whole. It generally shows the need for increased investments in the organization.
With this study, we can say that impairment loss is not good for the organization. Companies have to maintain the value of the assets. There must be a balance in the value of asset and the depriciation charged on the same. The companies should not us this for a shorter time benefits as it is harmful, for a longer run.
Investopedia, (2014). How is impairment loss calculated?, [Online], Accessed on: 16 September 206, Available at: https://www.investopedia.com/ask/answers/101314/how-impairment-loss-calculated.asp
Changsheng, H. and Yongfeng, W. (2012). Investor Sentiment and Assets Valuation. Systems Engineering Procedia, 3, pp.166-171.
Liu, F. (2013). Are Exact Calculation and Computational Estimation Categorically Different?. Applied Cognitive Psychology, p.n/a-n/a.
Martin, I. (2010). The valuation of long-dated assets. Cambridge, Mass.: National Bureau of Economic Research.
Pavliková, Ä½. and Kralik, A. (2014). Valuation of Business Assets. AMM, 708, pp.228-232.
Stoia-Djeska, M. and Frunzulica, F. (2015). Sensitivities Calculation for Unsteady Flow Problems. Proc. Appl. Math. Mech., 15(1), pp.689-690.
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