# Impaired Assets

G

#### Gregory L. Hansen

I left my class today unsatisfied over the discussion of impaired assets,
and would like to get some opinions.

The asset is impaired if the book value is less than the future economic
benefit. In that case the market value should be determined and the asset
written down to the market value.

An example was a machine with a book value of \$16,000, estimated future
cash flow of \$10,000, fair value of \$9,000. \$10,000 < \$16,000, so a loss
of \$16,000-\$9,000=\$7,000 should be written off.

But I wonder what the heck does the market value have to do with it? If
the estimated future economic benefit of the machine is \$10,000, then the
value of the machine to the company is \$10,000. Writing off the
difference between book and fair value seems like a statement that the
company would be better off selling the machine than keeping it in
production. But \$10,000 > \$9,000, so that would be wrong. What the
company could get for the machine is not the \$9,000 that someone else
would pay for it, but the \$10,000 from using it and running it into the
ground.

I also wonder what it means that the book value includes the costs of
transportation, installation, renovation, and everything else needed to
make it ready for its intended use, while the fair value is what someone
else would give you for it, and does not include those additional costs.
I have the urge to consider the entire replacement or upgrade cost.

P

#### Paul A. Thomas

Gregory L. Hansen said:
An example was a machine with a book value of \$16,000, estimated future
cash flow of \$10,000, fair value of \$9,000. \$10,000 < \$16,000, so a loss
of \$16,000-\$9,000=\$7,000 should be written off.

But I wonder what the heck does the market value have to do with it? If
the estimated future economic benefit of the machine is \$10,000, then the
value of the machine to the company is \$10,000.
If you are going to bother with that, you have to account for the "current"
value of those future dollars. If that machine will bring in (generate)
\$10,000 of income over a number of years say \$2000 over 5 years, then it
clearly isn't worth \$10,000 today, it's worth much less.

Writing off the difference between book and fair value seems
like a statement that the company would be better off selling
the machine than keeping it in production.
And that is a manangement decision. Remember though, that unless something
has a definitave number of units (or hours) in it's life cycle, then it's an
easy computation as to it's value. But look at Cuba, and see the 30 or so
year old cars that still run, and have a value far greater than what they
were paid for initially (if only they can be floated to the US).

But \$10,000 > \$9,000, so that would be wrong. What the
company could get for the machine is not the \$9,000 that someone else
would pay for it, but the \$10,000 from using it and running it into the
ground.

The current value of those future dollars is less than \$10,000 though.

I also wonder what it means that the book value includes the costs of
transportation, installation, renovation, and everything else needed to
make it ready for its intended use,
That's what the law requires. Actually, the machine sitting on the loading
dock is quite useless.

In fact, if you didn't install it, it was wasted money.

S

#### S.M.Serba

Gregory L. Hansen said:
I left my class today unsatisfied over the discussion of impaired assets,
and would like to get some opinions.

The asset is impaired if the book value is less than the future economic
benefit. In that case the market value should be determined and the asset
written down to the market value.

An example was a machine with a book value of \$16,000, estimated future
cash flow of \$10,000, fair value of \$9,000. \$10,000 < \$16,000, so a loss
of \$16,000-\$9,000=\$7,000 should be written off.
No. CAPITAL ASSETS are not IMPAIRED. MARKETABLE SECURITIES or INVESTMENTS
become impaired due to fluctuating market values. CAPITAL ASSETS are either
depreciated or amortized.
But I wonder what the heck does the market value have to do with it? If
the estimated future economic benefit of the machine is \$10,000, then the
value of the machine to the company is \$10,000. Writing off the
difference between book and fair value seems like a statement that the
company would be better off selling the machine than keeping it in
production. But \$10,000 > \$9,000, so that would be wrong. What the
company could get for the machine is not the \$9,000 that someone else
would pay for it, but the \$10,000 from using it and running it into the
ground.
See above re: CAPITAL ASSETS vs. MARKETABLE SECURITIES. Vehicles, equipment,
furniture & fixtures, capital leases do not become "impaired".
I also wonder what it means that the book value includes the costs of
transportation, installation, renovation, and everything else needed to
make it ready for its intended use, while the fair value is what someone
else would give you for it, and does not include those additional costs.
I have the urge to consider the entire replacement or upgrade cost.
You're still thinking Capital Assets here.

What impairment means is the following:

You have some stocks you purchased 6 months ago for \$60,000. They,
collectively, are now worth only \$55,000 on the market. They are now said to
be "impaired", their current market value is less than what you paid for
them.

DR Allowance for Excess of Cost Over Market Value
5,000.00
CR Unrealized Loss on Marketable Securities
5,000.00

D

#### David Jensen

No. CAPITAL ASSETS are not IMPAIRED. MARKETABLE SECURITIES or INVESTMENTS
become impaired due to fluctuating market values. CAPITAL ASSETS are either
depreciated or amortized.
Under specific circumstances, you can write down the value of productive
capital assets that have become partially obsolete.
See above re: CAPITAL ASSETS vs. MARKETABLE SECURITIES. Vehicles, equipment,
furniture & fixtures, capital leases do not become "impaired".

You're still thinking Capital Assets here.

What impairment means is the following:

You have some stocks you purchased 6 months ago for \$60,000. They,
collectively, are now worth only \$55,000 on the market. They are now said to
be "impaired", their current market value is less than what you paid for
them.

DR Allowance for Excess of Cost Over Market Value
5,000.00
CR Unrealized Loss on Marketable Securities
5,000.00
Do we say that anything other than the write-off of goodwill is
impairment? I was under the impression that mark-to-market wasn't
generally considered impairment.

G

#### Gregory L. Hansen

No. CAPITAL ASSETS are not IMPAIRED. MARKETABLE SECURITIES or INVESTMENTS
become impaired due to fluctuating market values. CAPITAL ASSETS are either
depreciated or amortized.

See above re: CAPITAL ASSETS vs. MARKETABLE SECURITIES. Vehicles, equipment,
furniture & fixtures, capital leases do not become "impaired".
According to my text book,

"Under a recent FASB pronouncement, corporations must review long-lived
tangible and intangible assets for impairment. Impairment occurs when
events or changed circumstances cause the estimated future cash flows
(future benefits) of these assets to fall below their book value."

And then they gave an example from Delta's 2000 annual report of sixteen
MD-90 aircraft and eight MD-11 aircraft being judged impaired and written
down to their fair market value.
You're still thinking Capital Assets here.

What impairment means is the following:

You have some stocks you purchased 6 months ago for \$60,000. They,
collectively, are now worth only \$55,000 on the market. They are now said to
be "impaired", their current market value is less than what you paid for
them.

DR Allowance for Excess of Cost Over Market Value
5,000.00
CR Unrealized Loss on Marketable Securities
5,000.00
That seems kind of dangerous. Securities markets fluctuate a lot, and
everyone knows that. Those impaired stocks might be worth \$100,000 next
month. But as I understand the rules, they can be written down to fair
market value, but can never be written up.

G

#### Gregory L. Hansen

If you are going to bother with that, you have to account for the "current"
value of those future dollars. If that machine will bring in (generate)
\$10,000 of income over a number of years say \$2000 over 5 years, then it
clearly isn't worth \$10,000 today, it's worth much less.
Yeah. But say that's \$10,000 adjusted dollars. It just seems like you
should either compare to future economic benefit and then write down to
future economic benefit, or compare to fair value and then write down to
fair value. I don't see why it makes sense to compare with one and then
write down to the other. And that the one to use should be the one that
results in the biggest return and the smallest writedown.
And that is a manangement decision. Remember though, that unless something
has a definitave number of units (or hours) in it's life cycle, then it's an
easy computation as to it's value. But look at Cuba, and see the 30 or so
year old cars that still run, and have a value far greater than what they
were paid for initially (if only they can be floated to the US).

The current value of those future dollars is less than \$10,000 though.

That's what the law requires.
That's the important point.
dock is quite useless.

In fact, if you didn't install it, it was wasted money.
It probably wouldn't depreciate as quickly then, either.

M

#### Matthew Pomeroy

1. Fluctuations in the market value of investments, and the resulting mark
to mark, do not necessarily imply impairment. In the context of
investments, "impairment" refers to an other than temporary condition. Under
FAS 115, "Accounting for Investments in Debt and Equity Securities",
"trading securities" mtm goes to earnings, "available for sale" mtm goes to
equity, and "held to maturity" is not mtm. However, if an "available for
sale" investment is "other than temporarily impaired" an impairment charge
should be recognized in earnings (as opposed to mtm in equity). Held to
maturity securities (as well as cost method investments outside the scope of
FAS 115), which otherwise would not be mtm, would be marked down and a
charge taken to earnings if there is an other than temporary impairment.

2. Impairment does apply to capital assets. See FASB Statement 144,
"Accounting for the Impairment or Disposal of Long Lived Assets", which
states:
..For purposes of this Statement, impairment is the condition that exists
when the carrying amount of a long-lived asset (asset group) exceeds its
fair value. An impairment loss shall be recognized only if the carrying
amount of a long-lived asset (asset group) is not recoverable and exceeds
its fair value. The carrying amount of a long-lived asset (asset group) is
not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset (asset
group).

An impairment loss shall be measured as the amount by which the carrying
amount of a long-lived asset (asset group) exceeds its fair value

S.M.Serba said:
Gregory L. Hansen said:
I left my class today unsatisfied over the discussion of impaired assets,
and would like to get some opinions.

The asset is impaired if the book value is less than the future economic
benefit. In that case the market value should be determined and the asset
written down to the market value.

An example was a machine with a book value of \$16,000, estimated future
cash flow of \$10,000, fair value of \$9,000. \$10,000 < \$16,000, so a loss
of \$16,000-\$9,000=\$7,000 should be written off.
No. CAPITAL ASSETS are not IMPAIRED. MARKETABLE SECURITIES or INVESTMENTS
become impaired due to fluctuating market values. CAPITAL ASSETS are either
depreciated or amortized.
But I wonder what the heck does the market value have to do with it? If
the estimated future economic benefit of the machine is \$10,000, then the
value of the machine to the company is \$10,000. Writing off the
difference between book and fair value seems like a statement that the
company would be better off selling the machine than keeping it in
production. But \$10,000 > \$9,000, so that would be wrong. What the
company could get for the machine is not the \$9,000 that someone else
would pay for it, but the \$10,000 from using it and running it into the
ground.
See above re: CAPITAL ASSETS vs. MARKETABLE SECURITIES. Vehicles, equipment,
furniture & fixtures, capital leases do not become "impaired".
I also wonder what it means that the book value includes the costs of
transportation, installation, renovation, and everything else needed to
make it ready for its intended use, while the fair value is what someone
else would give you for it, and does not include those additional costs.
I have the urge to consider the entire replacement or upgrade cost.
You're still thinking Capital Assets here.

What impairment means is the following:

You have some stocks you purchased 6 months ago for \$60,000. They,
collectively, are now worth only \$55,000 on the market. They are now said to
be "impaired", their current market value is less than what you paid for
them.

DR Allowance for Excess of Cost Over Market Value
5,000.00
CR Unrealized Loss on Marketable Securities
5,000.00