LO7–8 Identify impairment situations and describe the two-step impairment process.

What is asset impairment?

A significant decline in the expected future benefits (cash flows) of a long‑term asset.

Something happens that causes the asset to suddenly lose a big chunk of its value

• Store closes

• Product line fails

• Machine is no longer in use

• Brand loses value to due bad publicity

When must management test for impairment?

When events suggest the asset’s future cash flows may be lower than expected.

What causes impairment?

Expected future cash flows fall below the asset’s book value.

When to test for impairment?

Only when something happens that suggests the asset might not be worth what the books say

Managment must check whether the asset is still worth its book value

Step 1 of impairment testing

Compare future cash flows to book value.

If cash flows < book value → asset is impaired

If cash flows > book value —> stop no impairment, no loss

Step 2 of impairment

If impaired, record loss

Impairment loss = Book Value - Fair value —> you write this off

Example

Trademark cost: $60,000

Accumulated amortization: $10,000

Book value: $50,000

Future expected cash flows: $20,000

Book value > expected cash flow —> IMPAIRED

50,000 - 12,000 = $38,000

Debit loss 38,000

Credit trademarks 38,000

Net income decreases by $38,000

Total assets decrease by $38,000

Trademark now appears at $12,000 (its fair value)

When do we record an impairment loss?

Only when both future cash flows < book value and fair value < book value.

How does impairment affect the income statement?

Increases expenses → reduces net income.

How does impairment affect the balance sheet?

Reduces total assets by the impairment amount.

Can an impaired asset be written back up later?

No — under U.S. GAAP, impairment cannot be reversed.

Do indefinite‑life intangibles (goodwill & some trademarks) use the two‑step test?

No — they skip Step 1 and go straight to comparing book value to fair value.

Why is Step 1 skipped for indefinite‑life intangibles?

Because they are assumed to generate cash flows indefinitely, so cash flow estimates aren’t meaningful.

What triggers impairment?

Future cash flows < book value.

How is impairment loss measured?

Book value − fair value.

Which assets skip Step 1?

Indefinite‑life intangibles (e.g., goodwill).