Abstract:

Business assets that have suffered a loss in value are subject to impairment testing to measure and recognize the amount of the loss. A loss on impairment is recognized as a debit to Loss on impairment (the difference between the new fair market value and current book value of the asset) and a credit to the asset. The loss will reduce income in the income statement and reduce total assets on the balance sheet. An asset impairment loss that arises during a period results from a decline in fair value due to some external event. Fair values are based on discounted cash flows, not undiscounted cash flows. Therefore, using undiscounted cash flows to signal an impairment loss ignores the actual decline in fair value that occurred. Firms will not recognize the asset impairment loss as long as the undiscounted cash flows exceed the carrying value of the asset.