Journal Entry for Impairment Loss

Impairment loss is the deduction of assets value when the market value falls below the carrying amount on balance sheet. It is also known as the difference between carrying amount and recoverable amount.

Impairment is the process by which that company compares the asset’s book value and the fair value. It aims to prevent any overstate of assets and ensure a true and fair financial statement. The impairment is done on a regular basis to prevent such things from happening.

Several assets fall under the subject of impairment include accounts receivable, Land, building, and intangible assets. Impairment will not incur to the cash and cash equivalent as it is the liquid assets on the balance sheet.

Moreover, the company can perform an impairment test when there are some indicators that are highly likely to be impaired. The indicators are different depending on the type of assets. The accounts receivable may be impaired when the company does not expect to collect them back. The major customers have been out of business, so the accounts receivable will be uncollected. The building or other fixed assets may be impaired when there is physical damage and a decrease in the production capacity.

The new technology can impair the company assets when it leads to the obsolete of the current system. The company will not be able to generate future economic benefits from the system and they need to upgrade to the latest version. This is the indicator that leads to the impairment of company software.

When the company has identified the potential indicators, they need to perform an impairment test of certain assets. When the impairment loss is quantified, the company needs to adjust the financial statement to prevent any overstate of assets.

Journal Entry for Impairment Loss

When the company performs an impairment test over a specific asset, they compare between book value and fair value (recoverable amount). The impairment loss is when the book value is higher than the fair value.

As the result, company needs to reduce the asset’s book value from the balance sheet. The other side of the journal entry will impact the expense on income statement.

The journal entry is debiting impairment expense and credit the impaired asset.

The impairment will increase expenses on the income statement. The assets balance will decrease to reflect the fair value.

Journal Entry for Impairment Loss Example

ABC is a tire manufacturer in Southeast Asia. During the year, there is a big flood in the region. It has damaged the machine in the factory and stopped the operation for a few weeks. Management has concerned about the physical damage of the machinery, so they have engaged the technical experts to access the production capacity of each machinery. As a result, the expert has estimated the impairment loss of $ 50 million over the total damage of machinery. Please record the journal entry of impairment loss.

Based on the report from a technical expert, the impairment loss is $ 50 million. So we need to reduce the balance of fixed assets (machinery) by $ 50 million and record impairment expenses.

The journal entry is debiting impairment expense $ 50 million and credit machinery $ 50 million.