When it comes to managing finances, it is important to understand the different components that make up the income statement. One of the most important aspects of the income statement is the impairment loss. Impairment loss can have a significant impact on the overall financial health of a business. Therefore, it is important to be aware of what impairment loss is, how it is calculated, and how it affects the income statement. In this blog post, we will discuss impairment loss and how it is reported on an income statement. We will explore how to identify impairment losses, how to record them on an income statement, and how to calculate the impairment loss. Furthermore, we will examine the implications of impairment losses on the financial health of a business. By the end of this post, readers should have a better understanding of impairment loss, and be able to use this information to make more informed financial decisions.
Why is it important to put an impairment loss on an income statement?
It’s crucial to record an impairment loss on an income statement because doing so can make it simpler to monitor your company’s financial accuracy and prevent errors like overstatements. If an asset’s value exhibits certain signs of inaccuracy, such as an overestimation of the projected revenue gain, it is helpful to periodically test the asset’s value for impairment because having this knowledge can help you make wise financial decisions.
What is an impairment loss on an income statement?
Impairment loss on an income statement denotes a long-term decline in the value of a company’s or business’s assets. Intangible and fixed assets are both susceptible to this value decline.
It might be necessary to check an asset’s impairment value in order to estimate impairment loss. You can accomplish this by routinely contrasting the asset’s estimated value, or fair value, with the asset’s current book value. In this instance, book value represents the actual value of an asset. You can subtract the difference if the current book value is higher than the asset’s projected fair value, and the asset’s value will decline on the financial statement of the business. When this occurs, you speak of the asset as being impaired.
How do impairment losses work?
When calculating an impairment loss, an asset’s current book value is used to determine how much less it is than its overall fair value. The equation is for impairment loss is:
Impairment loss = book value – fair value
When a circumstance or condition may have an impact on the asset’s usable life, also known as the asset’s useful life, this type of impairment may take place.
The majority of production assets, such as the machinery you might find in a factory, have an anticipated or projected lifespan before the owner needs to maintain, upgrade, or dispose of it. The equipment’s owner should get the most use possible out of it considering how much it cost to buy. Calculating the impairment loss for that item is appropriate if the equipment malfunctions before the owner has a chance to use it for its entire useful life.
Examples of impairment loss on income statement
Here are some instances of how businesses determine the impairment losses of various kinds of assets:
Broken machines
A manufacturer of cutting-edge technology products is Koelpin Technologies. Recently, the business invested in a number of brand-new automated tools to aid in the production of their newest products. The seller of the automated equipment advised Koelpin Technologies that it would be at least five years before they needed to repair or upgrade the new machines. Koelpin Technologies buys 50 of these devices based on the supposition that they will last for at least five years. Each machine costs $500 to purchase, for a total of $250,000 in purchases.
Half of the machines experience significant dysfunction two years after Koelpin Technologies purchases them. The machines must be put through an impairment test, according to Koelpin Technologies. Koelpin Technologies determines that the 25 defective machines now have an estimated value of $200 each after carefully analyzing the problems with the machines.
The staff accountant takes into account the following data when calculating an impairment loss:
Damaged building
The Westlake County and Rose County school districts are supervised by the Suncoast City Public School Board. The board determines they can save money by combining all the elementary students from both counties into one sizable school building because the population density for these two counties is so low. The board spends $700,000 on an outdated school building for this project.
Soon after, a strong earthquake strikes the region, seriously damaging the recently bought building. Following the catastrophe, the board determines that an impairment test is necessary. The board determines that the school’s estimated value is now $300,000 after assessing all of the damages.
The district’s primary school accountant takes into account the following data when calculating impairment loss:
Company asset acquisition
Bosco & Millier is a sizable entertainment media conglomerate that produces popular television programs and motion pictures. Recently, the business has consistently pursued a strategy of acquiring the assets of smaller media companies. Bosco & Miller wants to keep growing after realizing the financial benefits of purchasing these small competitors. They do this by purchasing the $30 million in book value assets of a small media company called Tree Television.
After Tree Television is embroiled in a significant controversy, Bosco & Miller determine that they must assess the assets of Tree Television for impairment. Following the evaluation, they learn that Tree Televisions’ revenue significantly decreased as a result of the controversy and never fully recovered. Tree Television’s assets are currently only worth $15 million as a result of this drastic revenue decline.
The head accountant of Bosco & Miller takes into account the following data when accounting for impairment loss:
Impairment of Assets | Impact on Financial Statement
FAQ
Where does an impairment loss go on the income statement?
The income statement’s section where you list other operating income and expenses is where the asset impairment loss is reported. An impairment loss eventually lowers the profit your company reports for the period, but it doesn’t immediately affect the cash on hand.
How do you record impairment loss on an income statement?
A loss due to impairment should be recorded if testing confirms impairment. An impairment loss reduces the value of the impaired asset on the balance sheet while also recording an expense in the current period that appears on the income statement.
Does impairment loss go on income statement?
An organization must report an impairment loss in the income from continuing operations line on its income statement before taxes.
When should an impairment loss be recognized in the income statement?
If an impairment loss results from a revaluation decrease under IAS 16 or IAS 38, it is recognized immediately in profit or loss (or in comprehensive income otherwise).
