Impairment of assets due to floodings

Impairment of assets due to floodings
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Impairment of assets due to floodings

Overview of Impairment-Assets Accounting

An asset impairment arises when there is a sudden drop in the fair value of an asset below its recorded cost. The accounting for asset impairment is to write off the difference between the fair value and the recorded cost.

Flooding continues across Malaysia! Do you know how to account for impairment of assets due to flood?

Here are some tips for you.

Key takeaways:

I. What is an impairment loss

II. What is an impairment test in accounting?

III. How do you treat the impairment of assets in accounting?

IV. How do you record an impairment of an asset?

V. Is an impairment an expense?

VI. Which accounting standard is applicable for impairment of assets?

VII. Indicators of impairment

Summary of learnings:

I. What is impairment loss?

An impaired asset is an asset valued at less than book value or net carrying value. In other words, an impaired asset has a current market value that is less than the value listed on the balance sheet. To account for the loss, the company's balance sheet must be updated to reflect the asset's new diminished value.

Floods can cause damage to the appliances on your premises. including the heating, ventilation and air conditioning system, water heaters or refrigerators. As a result, we can no longer recover any value through the use or sale of damaged assets.

We will need to provide impairment when the recoverable amount of an asset is less than the book value of an asset.

II. What is an impairment test in accounting?

An impairment test is an accounting procedure carried out to find out if an asset is impaired, i.e. whether the economic benefits that the asset embodies have dropped drastically. In general, if the carrying value of an asset exceeds the sum of undiscounted expected cash flows of an asset, the asset is impaired.

III. How do you treat the impairment of assets in accounting?

If the recoverable amount of the asset is more than the carrying amount, then the impairment loss has to be reversed and it has to be treated as income in the books of accounts. The reversal of impairment loss previously recognized for a cash-generating unit has to be allocated first to the assets, then goodwill.

IV. How do you record an impairment of an asset?

The total dollar value of impairment is the difference between the asset's carrying cost and the lower market value of the item. The journal entry to record an impairment is a debit to a loss, or expense, account and a credit to the related asset.

V. Is an impairment an expense?

Impairment is a non-cash expense that is reported under the operating expenses section of the income statement.

VI. Which accounting standard is applicable for impairment of assets?

The core principle in Malaysian Private Entities Reporting Standard (MPERS) – Section 27.5 to 27.9is that an asset must not be carried in the financial statements at more than the highest amount to be recovered through its use or sale. If the carrying amount exceeds the recoverable amount, the asset is described as impaired.

VII. Indicators of impairment

What are the other indicators except for flooding? Such as:-

External factors:

- Market value declines

- Negative changes in technology, markets, economy, or laws

- Increases in market interest rates

- Carrying amounts of assets higher than market value

Internal factors:

- obsolescence or physical damage

- asset is idle, part of a restructuring or held for disposal

- economic performance if an assets worse than expected

Source:

Malaysian Private Entities Reporting Standard (MPERS) – Section 27.5 to 27.9

https://www.cas.net.my/wp-content/uploads/2013/02/MPERS-Framework.pdf

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