Top Stories | Mon, 23 Dec 2024 12:44 PM

Top 20 Interview Questions and Answers on Impairments: A Comprehensive Guide

Posted by : SHALINI SHARMA

Impairment arises whenever the carrying value of any asset is more than the recoverable amount. Generally, this happens when it's no longer worth as much as what has been recorded on the balance sheet. This usually happens during market changes, obsolescence, or when due to physical damage.

Some points:

Carrying Amount: The value of that asset on the balance sheet.

Recoverable Amount: The greater of an asset's fair value (what it can be sold for) or its value in use (future cash flows that it can generate).

Impairment Loss: The loss between the carrying amount and the recoverable amount and is written off as a cost.

Example: Machine's carrying value is at $100,000 and its recoverable amount being $60,000 for the future cash flow reduced. In this case, an impairment loss of $40,000 is taken.

Impairment ensures that assets are not overvalued on the balance sheet, thus keeping the financial statements accurate.

1.What is Impairment?

Impairment means the carrying amount of an asset exceeds its recoverable amount. That means, the value of that asset has gone down a lot. Most of the times, this impairment causes impairment loss that is recorded in the financial statements. Both tangible and intangible assets may undergo impairment.

2.Difference Between Depreciation and Impairment

Depreciation is the standard distribution of the cost of an asset over its effective life, whereas impairment is the recognition of a permanent decrease in value of an asset due to factors like obsolescence, physical damage, or changes in the conditions of the market.

3.How Do You Recognize Impairment in Financial Statements?

Impairment is identified through an impairment test, which involves comparing the asset’s carrying value to its recoverable amount. If the carrying value exceeds the recoverable amount, the asset is impaired. The impairment loss is recognized and written off in the financial statements.

4.What is the Recoverable Amount of an Asset?

The recoverable amount is the higher between a given asset's fair value less costs to sell and its value in use. It can, therefore, be described as the sum at which an asset can either be recovered through sale or it will continue to be useful.

5.Can Goodwill Be Impaired?

Goodwill can indeed be impaired. Testing for impairment of goodwill takes place annually or when a trigger or indication that it has impaired exists, such as through a significant decline in its market value or business environment.

 

6.What are the Types of Impairment?

There exist two types of impairment. Namely;

Asset-specific impairment: An impairment that occurs to one specific asset due to the existence of a permanent decrease in value.

Goodwill Impairment. It is observed when goodwill's carrying value is higher than its recoverable amount.

7.How do You Recognize an Impairment Loss on the Income Statement?

The loss from impairment affects the asset's carrying amount in the balance sheet. In addition to this, impairment loss increases the loss for the business organization that appears in its income statement.

8.How do you test for impairment?

To test for impairment, first, determine the asset’s carrying value. Then, calculate its recoverable amount (higher of fair value less costs to sell or value in use). If the carrying value exceeds the recoverable amount, an impairment loss is recognized.

9.How Do You Calculate Impairment Loss?

Impairment loss is calculated by subtracting the recoverable amount of the asset from its carrying amount. When the carrying amount exceeds the recoverable amount, then the difference is recorded as an impairment loss.

10.What is the Impairment of Assets under IFRS?

Under IFRS, impairment is recognized if the carrying amount of an asset exceeds its recoverable amount. Impairment testing for goodwill and other intangible assets having indefinite lives shall be performed at least annually or whenever events or changes in circumstances indicate that the asset may be impaired.

11.What is the Impairment of Assets under GAAP?

Impairment testing is done similarly under GAAP. An impairment loss is recognized if the carrying amount of an asset exceeds its recoverable amount. GAAP also requires impairment of goodwill and intangible assets with indefinite lives to be tested at least annually.

12.What is an Impairment Reversal?

An impairment reversal occurs when the recoverable amount of an asset increases after an impairment loss has been recognized. Under IFRS, impairment reversals are allowed (except for goodwill), whereas under GAAP, impairment reversals are not permitted.

13.What if an Asset is Impaired?

If an asset is impaired, it carrying amount is reduced to its recoverable amount. The impairment loss is reported in the income statement, and the reduced carrying amount is reported in the balance sheet.

14.When Do You Need to Perform an Impairment Test?

Annual impairment testing should be carried out on goodwill and other intangible assets held that have an indefinite useful life. Thereafter, in case of signs showing that an asset might be impaired, impairment should be carried out at once.

15.Impact of Impairment to the Financial Statements?

Impairment reduces the carrying value of the asset on the balance sheet and is recorded as an expense on the income statement, which reduces the net income. It can also affect the company's equity and may impact other financial ratios.

16.How Can Impairment Affect a Company's Stock Price?

It typically means that the impairment loss would be recognized by indicating the company's assets value as less than previously supposed and can negatively affect the confidence of the investors and a downturn in the stock price.

17.What Are Indicators of Impairment?

 The indicators of impairment include;

 Significant decline in the market value.

 There has been a change in technological, economic, or legal environment.

 There is evidence that the asset has become damaged

 Poor performance of the asset.

18.What is the Role of Discounted Cash Flows in Impairment Testing?

Discounted cash flows (DCF) are applied to determine the value in use of an asset. In case the DCF- based recoverable amount is lower than the carrying value of the asset, an impairment loss is recorded.

19.Can You Reverse an Impairment Loss?

Under IFRS impairment losses can be reversed but only if there has been a change in the estimate used to determine the recoverable amount of the asset. Whereas under GAAP it is not possible to reverse an impairment loss for assets other than goodwill.

20.How Would Your Account for Impairment in Consolidated Financial Statement?

In consolidated financial statements, the impairment loss is recognized for the group as a whole. The loss is allocated to the parent company and its subsidiaries based on their share of the carrying value.