How to Calculate Asset Impairments

Considering asset impairment can be a difficult process for a company or business. Many factors contribute to asset impairment, in which a physical asset experiences a decline in its utility, and, thus, its value. Businesses often assess physical assets like properties, vehicles or large pieces of equipment for asset impairment. This complex process is different in each case, but here are some of the basic steps that business leaders use to identify and calculate asset impairment for their business assets.

Steps

    1
    Evaluate all factors that may contribute to asset impairment. One of the first steps in the process of assessing asset impairment for tax purposes is to examine all of the factors that may be negatively affecting the value or service utility of the held asset.
        Consider "global" factors such as market changes, changes in legislation or changes in interest rates. All of these factors, which are outside of the scope of the business itself, can have a dramatic affect on asset utility and value.
        Look for obsolescence as a cause of asset impairment. As assets get older, and new technology appears, the value and use of those assets can decline greatly. Try to place a value decline on the changes in technology that have affected your asset.
        Evaluate damage to an asset. Another way that an asset can be impaired is when it is damaged beyond use. Even if use is only compromised, this can lead to effective asset impairment.
    2
    Consider the eligibility of an asset for impairment. Experts point out that there are various rules that must be met for declaring an asset to be impaired. Read about these and apply them to your situation.
        One way to evaluate whether an asset is impaired is to see if its general carrying amount or cost of holding is greater than its theoretical cost of sale.
        Other rules about timeframes for holding assets may apply to declaring an asset impaired. Consult appropriate accounting or tax professionals to determine whether your assets can be effectively declared as impaired assets.
    3
    Calculate fair market value or value in use.
        Understand that fair value is the value that a sale might bring on the market.
        Learn about value in use. Value in use is the future cash flow the asset is expected to generate.
    4
    Apply the fair market value and value in use to the carrying value to see which is greater. It is impaired if the cost of holding an asset is greater than its sale or use values.
    5
    Implement disclosure. In many cases, business leaders may need to disclose information about the apparent assets for tax purposes.