Asset impairment accounting is the practice of valuing assets to determine whether the cost of carrying them is more than the value that they are providing to a business. Professional accountants who engage in asset impairment evaluation are looking critically at how an asset affects the bottom line and total profits of a business or enterprise. This type of accounting helps business leaders to benefit from an optimized annual tax return, and recover more of the cost of doing business in any given year.
Accountants who handle asset impairment may assess factors such as market changes or changes in the prime lending interest rate to see if these changes have hurt the value of an asset. They may also consider any recent legislation that may have changed the value that the asset provides. These are noted and applied to what the “real value” of the asset is.
The professionals who look at asset values for a business may also consider an asset to be “impaired” due to obsolescence or damage. These individuals are known for having a critical eye toward specific changes in a “value of use,” which determines exactly how much a business will get out of an asset.
When individuals with advanced knowledge of accounting do practice asset impairment accounting, they may also have to look at outside factors such as rules for declaring an asset impaired, or regulations on how much value can be claimed as an impairment. Details on this circulate within the industry, and accountants can also get appropriate information from government offices handling this kind of issue. In general, many of the questions around asset impairment accounting revolve around what can be considered a fair market value for an asset.
It’s important to note that asset impairment accounting is generally applied to large and complex assets, such as warehousing locations, departments, or properties. The smaller physical assets like equipment and vehicles generally will not need this kind of complex analysis. Still, some of these smaller assets could also be claimed as impaired, based on specific market changes or other environmental factors.
Asset impairment accounting is part of a wider strategy around using loss of value as business deductions on total income. Depreciation of assets is also a common strategy that goes along with asset impairment. For most businesses, the best way to figure out these issues is by consulting a professional who knows the ins and outs of asset valuation.