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An Insight into Asset Impairment

Asset impairment is a situation in which the usefulness of an asset suddenly declines, making it so expensive to
maintain that it can no longer be expected that it will pay for itself through future cash flows. A company can
choose to maintain the asset on its books but write down the value to more accurately reflect its value, or it can
list the asset for sale and dispose of it. Once an asset is impaired, it cannot be recovered. Therefore, companies
should test assets before placing them in this category.
IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their
recoverable amount (i.e. the higher of fair value less costs of disposal and value in use). With the exception of
goodwill and certain intangible assets for which an annual impairment test is required, entities are required to
conduct impairment tests where there is an indication of impairment of an asset. The test may be conducted at
the asset level or for a 'cash-generating unit.'

What is impairment?
If the recoverable amount of an asset is less than the assets carrying amount:
The asset is impaired
The assets carrying amount should be reduced to the recoverable amount

What is the recoverable amount of an asset?


The recoverable amount of an asset is the greater of:
1. The net selling price of the asset or
2. The assets value in use
An example:
Asset A

Asset B

Cost

1000

1000

Accumulated Reserve

400

400

Carrying Amount

600

600

Recoverable Amount

900

400

Asset not impaired

Asset is impaired - reduce


the carrying amount

When does an asset need to be impaired?


There are several circumstances under which an asset can become impaired.
There can be external sources such as:

Market value declines


Negative changes in technology, markets, economy, or laws
Increases in market interest rates
Or internal sources:
Obsolescence or physical damage
Asset is idle, part of a restructuring or held for disposal
Poorer economic performance than expected

Which assets can be impaired?


IAS 36 applies to:
Land
Buildings
Machinery and equipment
Investment property carried at cost
Intangible assets
Goodwill
Assets carried at revalued amounts under IAS 16 and IAS 38

How does impairment work in Oracle Assets?


These are the processes for creating, posting and managing asset impairments in Oracle Assets:
Assigning Cash-Generating Units to Assets (optional)
Entering and Uploading Asset Impairments
Updating Asset Impairments
Reviewing Asset Impairment Reports
Posting Asset Impairments
Viewing Asset Impairments
Rolling Back Asset Impairments
Deleting Asset Impairments

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