In accounting, when an asset loses value the asset becomes impaired. The accountant must write down the asset to the impairment value, which reports the actual value of the asset. If the accountant does not report the impairment, then the asset is overvalued on the balance sheet.
Impaired or Not Impaired
An accountant must test for impairment each year or when they believe an asset is impaired. To determine if an asset is impaired, subtract the net carrying value of the asset from the undiscounted future net cash flows. If the result is positive, there is no impairment. If the result is negative, the asset is impaired.
Type-Impaired Asset Held for Use
If the company plans to keep the asset and use the asset, there are special impairment rules. The company must write down the asset to the impaired value. The company must also keep depreciating the asset. The asset cannot recover the impaired amount.
Type-Impaired Asset to Sell
The impairment loss on the asset is the impairment plus any cost to dispose of the asset. The company must then write down the asset for this amount. The company cannot depreciate the asset anymore. If the asset regains value, then the company can restore the depreciation previously taken.