Impairment accounting is the branch of accounting that deals with the cost of the fixed assets and also referred as impairment accounting of fixed assets. The impairment of the fixed arises in a situation where the actual cost of the asset is more than the market value of the fair price of the asset and the difference of both costs is non-recoverable and treated as a loss to the company. The difference between the actual cost and the fair value is called as the amount of impairment of the asset.
The actual amount or actual cost of the asset is a non-recoverable amount and it is consider as a loss it exceeds the discounted cash flows that are retrieved on the usage of the asset depending upon the useful life of the assets. We explained earlier that the impairment amount is a difference between the actual cost or carrying amount and the fair value of the asset. The impairment amount reduces the actual cost of the asset. The cost of impairment of the asset should be recognized at the lowest level as at this level the cash flows of a particular asset are independent of the cash flows of other assets. In the companies where the cash flow of individual assets are not recognizable the assets are combined to form an entity and impairment is calculated at entity level. There are certain parameters that can be used to find out whether the carrying cost of the asset will be recoverable or not these parameter include cash flow, costs, disposal, legal issues and the market price associated with the asset.
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