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Impaired Assets

I left my class today unsatisfied over the discussion of impaired assets, and would like to get some opinions.

The asset is impaired if the book value is less than the future economic benefit. In that case the market value should be determined and the asset written down to the market value.

An example was a machine with a book value of $16,000, estimated future cash flow of $10,000, fair value of $9,000. $10,000 < $16,000, so a loss of $16,000-$9,000=$7,000 should be written off.

But I wonder what the heck does the market value have to do with it? If the estimated future economic benefit of the machine is $10,000, then the value of the machine to the company is $10,000. Writing off the difference between book and fair value seems like a statement that the company would be better off selling the machine than keeping it in production. But $10,000 > $9,000, so that would be wrong. What the company could get for the machine is not the $9,000 that someone else would pay for it, but the $10,000 from using it and running it into the ground.

I also wonder what it means that the book value includes the costs of transportation, installation, renovation, and everything else needed to make it ready for its intended use, while the fair value is what someone else would give you for it, and does not include those additional costs. I have the urge to consider the entire replacement or upgrade cost.

Reply to
Gregory L. Hansen
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"Gregory L. Hansen" wrote

If you are going to bother with that, you have to account for the "current" value of those future dollars. If that machine will bring in (generate) $10,000 of income over a number of years say $2000 over 5 years, then it clearly isn't worth $10,000 today, it's worth much less.

And that is a manangement decision. Remember though, that unless something has a definitave number of units (or hours) in it's life cycle, then it's an easy computation as to it's value. But look at Cuba, and see the 30 or so year old cars that still run, and have a value far greater than what they were paid for initially (if only they can be floated to the US).

The current value of those future dollars is less than $10,000 though.

That's what the law requires. Actually, the machine sitting on the loading dock is quite useless.

In fact, if you didn't install it, it was wasted money.

Reply to
Paul A. Thomas

No. CAPITAL ASSETS are not IMPAIRED. MARKETABLE SECURITIES or INVESTMENTS become impaired due to fluctuating market values. CAPITAL ASSETS are either depreciated or amortized.

See above re: CAPITAL ASSETS vs. MARKETABLE SECURITIES. Vehicles, equipment, furniture & fixtures, capital leases do not become "impaired".

You're still thinking Capital Assets here.

What impairment means is the following:

You have some stocks you purchased 6 months ago for $60,000. They, collectively, are now worth only $55,000 on the market. They are now said to be "impaired", their current market value is less than what you paid for them.

DR Allowance for Excess of Cost Over Market Value

5,000.00 CR Unrealized Loss on Marketable Securities 5,000.00
Reply to
S.M.Serba

On Wed, 2 Nov 2005 18:43:02 -0500, in alt.accounting "S.M.Serba" wrote in :

Under specific circumstances, you can write down the value of productive capital assets that have become partially obsolete.

Do we say that anything other than the write-off of goodwill is impairment? I was under the impression that mark-to-market wasn't generally considered impairment.

Reply to
David Jensen

According to my text book,

"Under a recent FASB pronouncement, corporations must review long-lived tangible and intangible assets for impairment. Impairment occurs when events or changed circumstances cause the estimated future cash flows (future benefits) of these assets to fall below their book value."

And then they gave an example from Delta's 2000 annual report of sixteen MD-90 aircraft and eight MD-11 aircraft being judged impaired and written down to their fair market value.

That seems kind of dangerous. Securities markets fluctuate a lot, and everyone knows that. Those impaired stocks might be worth $100,000 next month. But as I understand the rules, they can be written down to fair market value, but can never be written up.

Reply to
Gregory L. Hansen

Yeah. But say that's $10,000 adjusted dollars. It just seems like you should either compare to future economic benefit and then write down to future economic benefit, or compare to fair value and then write down to fair value. I don't see why it makes sense to compare with one and then write down to the other. And that the one to use should be the one that results in the biggest return and the smallest writedown.

That's the important point.

It probably wouldn't depreciate as quickly then, either.

Reply to
Gregory L. Hansen
  1. Fluctuations in the market value of investments, and the resulting mark to mark, do not necessarily imply impairment. In the context of investments, "impairment" refers to an other than temporary condition. Under FAS 115, "Accounting for Investments in Debt and Equity Securities", "trading securities" mtm goes to earnings, "available for sale" mtm goes to equity, and "held to maturity" is not mtm. However, if an "available for sale" investment is "other than temporarily impaired" an impairment charge should be recognized in earnings (as opposed to mtm in equity). Held to maturity securities (as well as cost method investments outside the scope of FAS 115), which otherwise would not be mtm, would be marked down and a charge taken to earnings if there is an other than temporary impairment.

  1. Impairment does apply to capital assets. See FASB Statement 144, "Accounting for the Impairment or Disposal of Long Lived Assets", which states: .For purposes of this Statement, impairment is the condition that exists when the carrying amount of a long-lived asset (asset group) exceeds its fair value. An impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group).

An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value

Reply to
Matthew Pomeroy

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