They Paved Paradise and Put Up . . . an Impairment?

In the days of our youth many of us would celebrate the arrival of the weekend, and just as quickly have a lingering regret. We had many expressions to describe this type of behavior. One we used to assess our callow youth on the morning after was “impairment.” Fortunately, I outgrew these desires and today I am content to enjoy a dry red wine, with a full body and plenty of tannins.

My first practical application with “impairment” was as an accounting professional with a fair number of years of experience. Much to my surprise the accounting version takes on a whole different meaning. It pertains to a long-lived or tangible fixed asset, often real estate, that is to be written-down in valuation due to a condition that is expected to be permanent.

Let’s talk about an “impairment” to asset valuation. This exists where the current market valuation of a fixed asset is less than the “carrying amount” of that asset, and the difference is expected to be permanent. The “carrying amount” is the original cost basis of the asset less any accumulated depreciation to date. Another expression is “net book value,” or NBV.

Assume it is learned that the adjoining building is to be demolished with the site planned to be used as a parking lot. This is regarded as a negative development within the community and neighboring properties are losing value.

Impairment criteria are four-fold:

1 – The “carrying amount” is more than the market value.

2 – The lower valuation is permanent.

3 – Net book value is recorded at the lower market value.

4 – The loss due to deferred-revenue is recorded in the statement of activities or income statement.

Let us do an example. You own a building which cost $500,000 and has been depreciated from its acquisition date by $270,000. The “carrying amount” or NBV is $230,000 (The $500,000 cost less accumulated depreciation of $270,000).

Appraisers have determined the value of your property will be $125,000 after the parking lot is in operation. GAAP requires that the “impairment” in asset value be recognized in the accounting records. The building’s value to be recorded in your books is $125,000 with a loss of $105,000 (the carrying amount of $230,000 less the appraisal value of $125,000) due to the write down of the asset. Impairment calculation:

Original cost                                                              $    500,000

Less:  Accumulated depreciation                                270,000

Carrying amount                                                            230,000

Appraisal value after parking lot                                125,000

Loss due to impairment                                          $    105,000

The building continues to be depreciated over its estimated useful life and the $105,000 loss due to impairment is declared in the year the impairment occurs.

You may want to regress back to your youth after a loss like that.

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Monday, April 11th, 2022