Definition

An impaired asset carries a market value that is less than its book value or the value that's listed on the company's balance sheet. The difference in value has to be accounted for and reflected as the asset’s new diminished value in the balance sheet.Impaired assets are generally long-term tangible assets. However, a company's accounts receivables and intangible assets may also become impaired.

Example

Here's how impaired assets can be accounted for:Suppose, a company incurred $250,000 on a fresh stock of inventory the previous year. However, the worth of the investor went down by $100,000 due to depreciation. As per the latest balance sheet, the book value of the inventory will therefore be $150,000. In some cases, companies may also make a provision for impairment losses under their balance sheet.

Why it matters

By accounting for impaired assets, companies can allow investors and stakeholders to get a clearer picture of their financial health. It tells investors and management that an asset now carries lesser value than actually expected.Some impaired assets may be beyond a company's control whereas some may be due to a lack of judgment by the company's management.For example, if a company's office is damaged by a natural disaster, it is impaired but there is no fault of the management. However, if a company's management extends credit without agreeing to repayment terms and does not recover it, such unrecoverable accounts receivables will be considered impaired assets and are due to poor decision-making.

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