Impairment is the amount by which the carrying amount of an asset exceeds its recoverable value. Recoverable value is higher of its fair value (disposal value) less cost of disposal and its value in use expected from its continued use.
Provision for Impairment:
Provision for impairment is based on prudence concept i.e. If the expected benefit from an asset whether in the shape of its disposal proceeds or benefits associated with its continued use is less than its current book value, the management should recognize the loss in value of asset immediately.
Cost of asset ………….…..…$ 1,000,000
Accumulated Depreciation……..$ 400,000
Carrying value …………………$ 600,000
Value of expected economic benefits if used further…..$ 500,000
Recoverable/disposal value ……$ 650,000
In the above example, carrying value of the asset i.e. $ 600,000 would be compared with higher value in use and recoverable value which is $ 650,000 in this case and is higher than the carrying value of the asset so impairment provision is not required.
If however, the recoverable value of assets drops to $ 550,000 in above case then there is an indication of impairment and management would need to record a provision for impairment amounting to $ 50,000 ($ 600,000-$ 550,000) as follows: