FIXED ASSETS AND IMPAIRMENT ISSUES

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Have changes in the economy impacted the worth of your property and equipment?

Under generally accepted accounting principles, your business property and equipment is recorded at the purchase price including sales tax, freight and installation expenses. After acquiring your business property, the property is then depreciated over its estimated useful life. Depreciation is a method to allocate in a systematic manner the cost of the property over the periods expected to be benefited by the use of the property. The useful life varies depending on the type of asset, the assets use and other factors.

Changes in operating and economic conditions can raise doubts about a company's ability to fully recover the carrying value (acquired cost less the total depreciation taken to date) of a particular asset or group of assets. The carrying value is not recoverable if it is greater than the sum of the cash flows expected from the asset's use and eventual disposal. The Financial Accounting Standards Board (FASB) defines impairment loss as the amount by which the carrying value exceeds an asset's fair value. Fair value can be determined by the amount an asset could be bought or sold for in a current transaction between willing parties. When it is determined that the carrying value will not be recovered, the asset is considered to be impaired.

The following situations may help you in identifying a possible asset impairment:

1. A significant decrease in the market price of an asset
2. A significant change in how the company uses an asset
3. A significant change in its physical condition
4. A significant adverse change in legal factors, business climate or regulations
5. A significant excess cost to acquire or construct an asset

If an asset is considered impaired, an impairment loss equal to the difference between the asset's carrying amount and fair value should be recognized by reducing the carrying amount of the impaired asset and charging it to the net income for the current period. The required information companies must disclose in the notes to the financial statements include:

1. A description of the impaired long-lived asset and the facts and circumstances leading to its impairment
2. The amount of the impairment loss and how fair value was determined
3. The amount of the impairment loss and the caption in the income statement if not separately presented on the face of the statement
4. The business segment(s) impacted, if applicable

After an impairment has been recognized, the asset's reduced carrying value becomes its new cost. Subsequent recoveries of the impairment loss due to increases in the asset's fair value should not be recognized.

In summary, company management should annually review and analyze their business assets for possible impairment. If it is evident that an asset is impaired, we can determine the potential write-down of the asset and the impact it will have on your financial statements.

- Theola Eng
Assurance Services Dept.