An asset impairment arises when there is a sudden drop in the fair value of an asset below its recorded cost. It is necessary to test assets for impairment at the lowest level at which there are identifiable cash flows that are largely independent of the cash flows of other assets.
 

Financial accounting and reporting require analysis of impairing review of Tangible assets as and when circumstances indicate that there is a diminution in their valuation. IAS 36/Indian GAAP – AS 28 states— Impairment of Assets requires testing the valuation of the tangible fixed assets that have been long-lived and when required with other assets tested where the asset might be impaired.

An individual tangible asset may be tested for impairment where independent cash flow can't be attributed for a single asset. Carrying value of the tangible asset compared to its recoverable amount – Fair Value less Cost of Disposal to determine whether the asset is impaired or not.

Sapient has the required expertise and skills needed to perform fair impairment analysis for senior management, auditors, valuation professionals, and regulators. We determine the fair value of the asset or group based on appropriate methodologies.
 

The impairment of a fixed asset can be described as an abrupt decrease in fair value due to physical damage, changes in existing laws creating a permanent decrease, increased competition, poor management, obsolescence of technology, etc. In the case of a fixed-asset impairment, the company needs to decrease its book value in the balance sheet and recognize a loss in the income statement.
 

All assets, either tangible or intangible, are prone to impairment. A tangible asset can be property, plant and machinery (PP&E), furniture and fixtures, etc., whereas intangible assets can be goodwill, patent, license, etc.
 

Indicators of Impairment Test
Companies must assess the external environment and look for the indicators below to decide when to impair assets. Given below are just some of the indicators relevant for impairment:
 

External factors:

• Drastic change in economic or legal factors affecting the company or its assets

• Significant fall in the market price of the asset

• Muted demand for a medium-term period due to global macroeconomic conditions
   

Internal factors:

• Asset as a part of a restructuring or held for disposal

• Obsolescence or physical damage to the asset

• Inability to bring in post-merger synergy benefits that were expected earlier

• Worse economic performance than what is expected