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In times of economic downturn, many companies face business challenges and
uncertainties that can negatively impact assets or reduce their
What is an asset impairment loss?
The initial recognition of an asset in the company's financial statements
is measured at cost. thereafter, at each reporting date, the consumption
(if any) and impairment (if any) of the assets are recorded at cost
deductions; in this regard, different types of assets should be accounted
for differently in accordance with the applicable accounting
For assets that are not revalued at fair value, the assets are considered
impaired if their carrying amount is higher than their recoverable value.
recoverable value is the higher the value of the used asset (use-value) or
immediate sale value (fair value fewer disposal costs).
Fair value is the price at which an asset can be sold in an ordered
market. use-value is the present value of future cash flows expected from
the use of the asset. the difference between carrying amount and
recoverable value is an impairment loss that should be recognized in the
income statement for the current period, or in other comprehensive gains
if the measurement of the asset is based on a revaluation other than fair
At the end of each reporting period, the company needs to assess whether
there are some indications that the assets may be impaired. if so, the
company should estimate the recoverable value of the assets. the following
are examples of signs of asset impairment:
the market value of the asset fell
credit rating decline (financial assets)
adverse changes in the technological, market, economic or legal
market interest rates rise
the company's net asset value is higher than its market
assets are scrapped or substantially damaged
assets are idle, or the company has plans to suspend or reorganize
operations or intends to sell assets
the economic performance of assets was worse than expected
Regardless of whether there are signs of impairment or not, companies are
required to conduct impairment assessments for the following assets every
goodwill resulting from business combinations
intangible assets that do not have a clear term of use
intangible assets that are not yet available for use
How to determine the impairment loss?
When there are signs of impairment or otherwise required, the company is
required to conduct an impairment assessment. if an asset cannot generate
cash flow independently of other assets, the company needs to identify the
smallest identifiable portfolio of assets (i.e., cash-generating units) to
which the asset belongs and which can generate cash flows independently
and determine its recoverable value.
There is a software manufacturing company whose management believes that
the properties, plants, machinery, and licenses under its manufacturing
operations constitute the smallest identifiable portfolio of assets that
can independently generate cash flow. the following is its impairment
Companies should disclose the events and circumstances that constitute an
impairment, as well as key assumptions of the impairment assessment, such
as the expected growth rate of sales, the final growth rate, and the
discount rate of use-value.
These disclosures provide useful information related to enterprise risk
management that investors can take into account when making investment