Asset impairment and write-downs are big deals in accounting. They make sure a company’s books reflect the real value of its assets. In India, these practices are guided by specific standards to keep things transparent and accurate.

 

What’s Asset Impairment?

Asset impairment happens when an asset’s book value (carrying amount) is more than what it can actually be sold for or used for (recoverable amount). Basically, if something you own is worth less than what your books say, you’ve got impairment.

Example: You have a machine listed at ₹10 lakhs. New tech makes it worth only ₹5 lakhs now. After checking it is found out that the recoverable amount is ₹4 lakhs. You need to impair it by ₹6 lakhs (₹10 lakhs – ₹4 lakhs).

 

What’s an Asset Write-Down?

A write-down is when you decrease the book value of an asset because its market value has tanked. This ensures the asset isn’t overvalued on your balance sheet.

Example: You have inventory valued at ₹2 lakhs. Demand drops, and now it’s worth ₹1 lakh. Write it down by ₹1 lakh.

 

Accounting for Impaired or Obsolete Assets

Here’s how you deal with impaired or obsolete assets in accounting, according to Indian standards (Ind AS).

  1. Spot the Signs
    Regularly check your assets for signs of impairment. Look for market shifts, new tech, damage, or legal issues. If you see these, test the asset for impairment.
  2. Figure Out the Recoverable Amount
    The recoverable amount is the higher of the asset’s fair value minus selling costs or its value in use (the present value of future cash flows from the asset).
  3. Record the Loss
    If the book value is more than the recoverable amount, record an impairment loss. The difference between two amounts is considered as loss.
    Example: Your building’s book value is ₹50 lakhs. After testing, the recoverable amount is ₹35 lakhs. Record an impairment loss of ₹15 lakhs (₹50 lakhs – ₹35 lakhs).
  4. Adjust the Book Value
    Adjust the asset’s book value to its recoverable amount. This hits your profit and loss statement and lowers the asset’s value on your balance sheet.
  5. Disclose the Details
    You must disclose impairment losses in your financial statements. Include what caused the impairment, the loss amount, and its impact.
 
Real-World Examples

Machinery Impairment
A textile manufacturer in Surat has looms worth ₹15 lakhs. Newer, better looms make the old ones worth only ₹6 lakhs. After testing, the recoverable amount is ₹5 lakhs. Record an impairment loss of ₹10 lakhs and adjust the looms to ₹5 lakhs.

Inventory Write-Down
A retailer in Mumbai holds seasonal clothing inventory worth ₹3 lakhs. End of the season, unsold stock’s value drops to ₹1 lakh. Write down the inventory by ₹2 lakhs to reflect its market value.

 

Questions to Understand your ability

Q: What happens during asset impairment?

  1. The asset’s market value increases
  2. The asset’s carrying amount exceeds its recoverable amount
  3. The asset is sold at a profit
  4. The asset’s lifespan is extended

 

Q: Which value is used to determine asset impairment?

  1. Book value
  2. Historical cost
  3. Recoverable amount
  4. Depreciation value

 

Q: What is an asset write-down?

  1. Increasing an asset’s book value
  2. Reducing an asset’s book value when its market value drops
  3. Selling an asset for cash
  4. Revaluing an asset at a higher price

 

Q: What must companies disclose in their financial statements regarding impairment?

  1. The initial cost of the asset
  2. The nature and amount of impairment losses
  3. The profit from selling the asset
  4. The original depreciation schedules

 

Q: How is the impairment loss calculated?

  1. By subtracting the historical cost from the book value
  2. By subtracting the fair value from the recoverable amount
  3. By subtracting the recoverable amount from the carrying amount
  4. By subtracting the market value from the selling price

 

Conclusion

Asset impairment and write-downs are key for honest and accurate financial statements. In India, following Ind AS guidelines keeps things clear and consistent. By keeping asset values realistic, companies show their true financial health, helping everyone make better decisions.

FAQ's
An asset’s book value surpasses its recoverable amount. We can assert that the asset’s book value exceeds its recoverable amount.

It’s crucial because it makes sure the company’s financial statements show the real value of its assets. No fake high values here.

A write-down slashes an asset’s book value when its market value has tanked. Keeps the balance sheet from showing inflated numbers.

We deduct an asset’s selling cost from its fair value or the present value of future cash flows from the asset to determine the recoverable amount. Whichever’s higher.

Things like market shifts, new tech, damage, or legal issues set off an impairment test. Watch out for these signs.

The impairment loss gets logged in the profit and loss statement and cuts down the asset’s book value on the balance sheet.

Companies got to spill the details: the nature and amount of the impairment losses, what caused them, and their impact on the finances.

Yup, if inventory’s market value dips below its book value, a write-down is a must to show its real worth in the books.