Question

Recall from assignment TVM3DEF that when we sold our machine at the end of its useful life we recorded a loss of $10,000 (difference between the selling price of $40,000 and book value of $50,000). Some students incorrectly called this an impairment loss. The correct entry is Cash 40,000 Loss on Sale 10,000 Accumulated Depreciation 250,000 Machine 300,000 Question: Why is this not an impairment loss? When does an impairment loss apply? I am not asking about the technical details about how to calculate the impairment loss. I am just looking for a brief explanation (in one or two sentences) about the basic difference between an impairment loss scenario and the scenario described above?

Answer 1

An impairment loss occurs when the carrying amount of an assets is less than the recoverable amount of an asset. An asset should be carefully measured for impairment loss each year. There are various factors due to which recoverable value falls:

a. External Indicators

i. Change in technology leading to the decline in value of the asset

ii. Increased market interest rate

iii. Restriction on the use of the asset due to the legal matters

iv. The carrying amount of the assets of the reporting enterprises is more than its market capitalization

b. Internal Indicators

i. Physical damage of the assets

ii. Concrete evidence from the internal reports about the poor performance of the asset

iii. Discontinuity of operations or plans of restructuring

In this case, there is no such indication referred. Therefore, there is no impairment loss and its capital loss on the sale of the asset.