Financial Audit for Impairment Losses: Guidelines for Auditing Long-Lived Assets

audit

It is important to consider impairment losses on your company’s long-lived assets or asset groups.  Accounting for an impairment loss is an integral part of understanding your company’s finances. We will review some important information to consider regarding impairment losses.  Remember, a financial audit from experienced tax professionals is the best way to inspect for impairment losses.

First, let’s understand what we are dealing with: the impairment loss is essentially a loss of value for a company or asset.  A long-lived asset is one which provides economic benefit beyond the present.  When a company possesses long-lived assets, impairment losses frequently follow.  Assets lose value over time for many reasons.  An experienced tax professional can assess your impairment losses for you.

When do we recognize an impairment loss on a long-lived asset or asset group? An impairment loss will be recognized if the following is true: the carrying value exceeds fair value of the asset or asset group, and the carrying value of the asset or asset group is not recoverable.

So now you have a better understanding of when an impairment loss is recognized, but how do we measure it? A company can measure the impairment loss of a long-lived asset through a simple equation: the carrying value of the asset minus the fair value of the asset. This might seem like a no-brainer, but it is absolutely essential that a company report the impairment loss in the current period’s income.

The next question you have might be this: when is it the responsibility of an entity to evaluate the recoverability of a long-lived asset or asset group? Below are some (but not all) of the possible instances where evaluation of long-lived asset or asset group could be in order.

  • A substantial decline in the asset or asset group’s market price;
  • An entity’s decision to use the asset substantially less or in a different way;
  • A considerable deterioration in the asset’s physical condition;
  • Significantly unfavorable legal, regulatory, or economic changes;
  • Maintenance and repair costs in excess of planned costs;
  • A current period operating loss or cash flow loss combined with any of the following:
    • A history of operating or cash flow losses;
    • A projection that indicates continued operating or cash flow losses; or
    • A change in expectations that leads management to believe that it is more likely than not that the entity will dispose of the asset or asset group before the end of its estimated useful life.

It is very important to note that the SEC warns that the projections and analyses which are used to evaluate impairment of long-lived assets and asset groups must remain consistent with those used for other financial statement calculations.  These analyses must also be completed in the same vein as budgets and forecasts which are prepared using forward-looking information. Experienced tax professionals can assist you in ensuring that your impairment loss assessment methods are consistent throughout your business.

If you would like to go into further detail regarding impairment losses, please contact our office today.