How do you write off impaired assets from the financial statement?

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A:

An accountant writes off an impaired asset by decreasing the book value of that asset on the company's balance sheet from its recorded cost to its fair value, assuming that the fair value of the asset has significantly declined below its recorded cost.

An impaired asset occurs when there is a sudden and irreversible drop in the fair value of an asset below its originally recorded cost. The impairment of an asset only occurs if the carrying amount of that asset is greater than the sum of undiscounted future cash flows generated from the asset over its remaining useful life – and that the value isn't recoverable.

When this occurs, the asset is considered to be impaired, and it must be written down. To do this, an accountant takes the impairment loss, which is the difference between the carrying value and the recently declined fair market value, and he subtracts it from the carrying value of that asset. The resulting value of the asset on the company's balance sheet is equal to the sharply declined fair market value of that asset.

To calculate the fair market value of the asset, an accountant needs to aggregate the undiscounted future cash flows that remain over the life of the asset. This decline in the value of the asset works to decrease the periodic depreciation expense that a company realizes and therefore the accumulated depreciation as well. This actually creates an increase in the company's net income slightly and also increases its taxes.


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