Impairment Asset: Definition, Examples and How to Calculate It

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##### What is Impairment Asset and How to Calculate It

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# What is Impairment Asset and How to Calculate It

In the world of accounting, there is one crucial concept that you need to know, namely asset impairment.

The concept of impairment is closely related to the terms “fair value” and “historical cost.”

So, to understand what asset impairment is and how to calculate it, let’s look at the following review.

## What is Asset Impairment?

Impairment is a term used to compare an asset’s purchase price in the past (historical cost) and the current market price.

The term asset impairment will appear when an asset is considered impaired.

In addition, several factors cause asset impairment, namely:

• Material changes
• Changes in asset prices
• Physical damage
• Asset disposal before the estimated date

The impairment can be done to determine assets that have decreased in value.

Impairment itself, in practice, can be done in almost all assets.

However, in this case, several exceptions are considered not to be impaired, namely:

• Deferred tax assets
• Employee benefits assets
• Financial assets
• Investment property at fair value
• Biological assets in the form of animals and plants
• Assets due to insurance contracts
• Fixed assets held for sale

## Impairment Asset Example

For you to understand more about the application of impairment in a company’s accounting, let’s look at the following examples of asset impairment:

For example, PT ABC has one machine purchased in 2015 for Rp. 50,000,000.

The machine is estimated to have an economic value of up to five (5) years.

Then, in 2020, PT ABC also estimates that there will be a decrease in the value of the machine.

In this case, it is known that the machine’s use value is estimated at around Rp. 20,000,000.

If you want to know the impairment, the first step that needs to be done is to calculate the depreciation value of the machine per year, namely the purchase price/economic value.

In the case of PT ABC above, the equation is Rp. 50,000,000/5 years, with a result of Rp. 10,000,000.

This means that the depreciation value of the machine from PT ABC was IDR 10,000,000 per year.

Meanwhile, if you want to know the remaining value/impairment of the machine, here’s the calculation formula:

Purchase value of the item – (age of the item x depreciation value of the item)

Referring to the calculation above, the remaining book value of PT ABC machines in 2020 is as follows:

= IDR 50,000,000 – (3 x IDR 10,000,000)

= IDR 20,000,000

When compared, the machine’s remaining book value is Rp. 20,000,000 with a value in the use value of Rp. 30,000,000, which means there is a difference of around Rp. 10,000,000 with a higher value in a use position.

This shows that the company does not have assets that have an impairment or loss on important assets.

However, it will be different if the machine’s residual book value is greater, which means there is a loss on important assets.

From the example above, you may wonder what the difference is between impairment and depreciation.

Impairment is a permanent decline in the value of assets, while depreciation is the distribution of acquisition costs incurred by the company over the useful life of an asset.

## How to Calculate Asset Impairment?

From the example above, it can be concluded that to calculate impairment in a company, some information is needed as follows:

### 1. Formula for depreciation amount per year:

Purchase price of goods / Age of goods

### 2. The formula for the remaining book value:

Purchase price of the item – (depreciation duration x purchase price of the item)

Meanwhile, value in use is obtained from estimated cash flows and is expected to be generated by assets.

As for these calculations, the results of impairment can be obtained, and it can be concluded that there is an impairment in the value of assets in the company.

As mentioned earlier, almost all assets can be impaired, but it is better to carry out routine impairments every year for certain assets.

The following assets fall into that category:

• Intangible assets that have unlimited benefits
• Intangible assets that are not yet available for use
• Goodwill was acquired in a company merger

## Conclusion

In conclusion, impairment is a term used to compare an asset’s purchase price in the past (historical cost) and the current market price.

The term asset impairment will appear when an asset is considered impaired.

Several factors cause asset impairment, namely material changes, changes in asset prices, physical damage, and disposal of assets before the estimated date.

Although it can be applied to almost all assets, some exceptions are not impaired, namely deferred tax assets, employee benefit assets, financial assets, investment properties at fair value, biological assets, assets due to insurance contracts, and fixed assets owned for sale.

You already know the definition of impairment, the formula, and how to calculate it.

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