Impairments occur when a company's assets lose value. If the actual fair market value of an asset decreases less than the book value of an asset, then the asset is impaired. The fair market value is the value of the asset in a transaction between unrelated parties. The book value of the asset is the amount the asset is worth on the company's financial statements. Impairments take the difference between the book value and fair market value and report the difference as an impairment loss.
Step 1
Subtract the fair market value of the asset from the book value of the asset. If the amount is positive, then there is no impairment loss.
Step 2
Determine if you are going to hold on and use the asset or if you are going to dispose of the asset.
Step 3
Subtract the future value or present value of any future net cash flows from the book value of the asset to find impairment loss if you are going to hold onto the asset. For this type of asset, you will then write the asset down to the fair market value. Continue to depreciate the asset using the new book value; you cannot restore any of the value in the asset you wrote down.
Step 4
Subtract the future value or present value of any future net cash flows from the book value of the asset, then add back the cost to dispose of the asset if you are going to get rid of it. This is the total impairment loss for an asset you are disposing of. With these assets, you need to write down the asset to fair market value, you can no longer depreciate the asset. If the asset regains value above the current book value, you are able to restore the value you wrote down.