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An '''Impairment cost''' must be included under expenses when the [[carrying value]] of a [[non-current asset]] exceeds the recoverable amount. Impairment of assets is the diminishing in quality, strength amount, or value of an asset. [[Fixed assets]], commonly known as PPE, refers to long-lived assets such as buildings, land, machinery, and equipment; these assets are the most likely to experience impairment, which may be caused by several factors.<ref>McKaig, T. (n.d.). Understanding Impairment Accounting: What It Is and When It Is Used - QFINANCE. Financial resources, articles, concepts and opinions from QFINANCE - QFINANCE. Retrieved April 3, 2013, from http://www.qfinance.com/accountancy-checklists/understanding-impairment-accounting-what-it-is-and-when-it-is-used</ref> Under [[IFRS]], the Impairment cost is calculated using two methods:

:*The Incurred Loss Model;
:*Expected Loss Model

==Incurred Loss Model==
Under the incurred loss model, investments are recognized as impaired when there is no longer reasonable assurance that the [[Cash flow|future cash flows]] associated with them will be either collected in their entirety or when due. Entities look for evidence of situations that would indicate impairment, such triggering events include when the entity:<ref>Donald Kieso, Jerry Weygandt, Terry Warfield, Nicola Young, Irene Wiecek (2010). Intermediate accounting (9th ed.). Canada: John Wiley & Sons Canada, Ltd. p. 554. ISBN 978-0-470-16101-2.</ref>
:*is experiencing notable financial difficulties,
:*has defaulted on or is late making interest payments or principal payments,
:*is likely to undergo a major financial reorganization or enter bankruptcy, or
:*is in a market that is experiencing significant negative economic change.

===Calculating Impairment Cost===
If such evidence exists, the next step is to estimate the investments recoverable amount. The '''Impairment cost''' would then be calculated by using the formula:

:::<math>\mbox{Impairment Cost} = {\mbox{Recoverable Amount} - \mbox{Carrying Value}}</math>

The carrying value is defined as the value of the asset as displayed on the [[balance sheet]]. The recoverable amount is the higher of either the asset's [[future value]]<ref>Etutorials. (n.d.). Recipe 5.16 Calculating Asset Appreciation (Future Value) :: Chapter 5. Numbers and Math :: Part I: Local Recipes :: Actionscript :: Programming :: eTutorials.org. eTutorials.org. Retrieved April 3, 2013, from http://etutorials.org/Programming/actionscript/Part+I+Local+Recipes/Chapter+5.+Numbers+and+Math/Recipe+5.16+Calculating+Asset+Appreciation+Future+Value/
</ref> for the company or the amount it can be sold for, minus any [[transaction costs]].<ref>IAS. (n.d.). IAS 36 — Impairment of Assets — IAS Plus. Deloitte. Retrieved April 3, 2013, from http://www.iasplus.com/en/standards/standard35</ref><ref>{{cite book|title=Intermediate accounting|year=2010|publisher=South-Western/Cengage Learning|location=Australia|isbn=978-0-324-65913-9|pages=532|author=Loren A. Nikolai, John D. Bazley, Jefferson P. Jones|edition=11th ed.|accessdate=4 January 2012}}</ref>

==Expected Loss Model==
Under an expected loss impairment model, estimates of [[Cash flow|future cash flows]] used to determine the present value of the investment are made on a continuous basis and do not rely on a triggering event to occur. Even though there may be no objective evidence that an impairment loss has been incurred, revised cash flow projections may indicate changes in [[credit risk]]. Under the expected loss model, these revised expected cash flows are [[discounted]] at the same effective interest rate used when the instrument was first acquired, therefore retaining a [[Historical cost|cost-based measurement]]. Calculating the '''Impairment cost''' is the same as the Incurred Loss Model.

==Example==
For example, assume a company has an investment in Company A bonds with a carrying amount of $37,500. If the [[market value]] of the bonds falls to $33,000, an impairment loss of $4,500 is indicated. Therefore an Impairment cost is calculated:

:::<math>$37500-$33000 = $4500</math>

This is recorded as a loss of $4,500 in the [[income statement]].
Using the [[Debits_and_credits#"T" accounts|'T' account]] system, there will be a debit in the Loss on Impairment account and a credit in the Investment account. This will mean the [[double-entry bookkeeping]] principle is satisfied.

'''Debit:''' Loss on Impairment $4,500
::'''Credit:''' Investment $4,500<ref>accountingexplained.com/financial/non-current-assets/impairment-of-assets</ref>

===Effect on depreciation===

To calculate [[depreciation]] on the asset, the new non-current asset value is considered. Continuing with the previous example, if using the [[Depreciation#Methods of depreciation|Straight line Depreciation]] method at say, 20%, then depreciation would be:

:::<math>$33000*0.2=$6600</math>

Therefore there is a smaller depreciation charge than if the original non-current asset value had been used.

==Consequent asset value increases==
Reversals of impairment losses are required for investments in [[Bond market|debt instruments]], but no reversals are permitted under [[IFRS]] for any impairment changes recognized in net income for equity instruments accounted for in [[Other Comprehensive Income|OCI]]; however, subsequent changes in the equity investment's fair value are recognized in [[Other Comprehensive Income|OCI]].

==See also==
*[[Lower of Cost or Market]]
*[[Impaired Asset]]

==References==
{{reflist}}

[[Category:Accounting terminology]]

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en>Harrias: closed as rejected