What Is an Impairment Charge?

Asset impairment means that the recoverable amount of an asset is lower than its book value. Assets here include single assets and asset groups, except for special regulations. An asset group refers to the smallest combination of assets that an enterprise can identify, and its cash inflows should be basically independent of the cash inflows generated by other assets or asset groups.

Impairment of assets

Asset impairment standard

I. Permanent

That is, the impairment of assets that cannot be recovered in the foreseeable future is recognized. Although this standard avoids the recognition of losses caused by temporary value fluctuations, it requires accountants to judge temporary impairment and permanent impairment.

Economics

That is, if the book value of an asset is higher than the recoverable amount on the balance sheet date, its impairment is recognized. It can accurately reflect the value of assets on the balance sheet date, avoiding the difficulty of distinguishing the type of asset impairment using professional judgment, and is easy to operate.

Third, the possibility

That is, the recognition of possible asset impairment is required. Its main purpose is to maintain consistency with historical costs and avoid recognition of unnecessary impairment losses.

China's "Enterprise Accounting System" and Enterprise Accounting Standards do not specify the recognition standards for asset impairment, resulting in poor operability in accounting practice. Because the nature and value of different assets have different rules, different recognition standards should be adopted for different types of assets. For example: short-term investments and entrusted loans have strong liquidity and liquidity capabilities, and companies generally do not hold them for a long period of time. It is not practical to use permanent or possibility criteria to confirm their impairment, so they can be measured by the value at a certain point in time. , That is, adopting economic standards. Permanent standards should be adopted for inventory and fixed assets. Because accounting personnel are generally relatively easy to distinguish between temporary or permanent impairment of such assets, such assets are generally large in number and variety, and the temporary impairment of most assets is not required to adopt permanent standards, which greatly reduces The number and type of assets that need to be devalued need to be confirmed, which reduces the workload and is in line with the cost-effectiveness principle. The value of long-term investments varies greatly over a period of time. Information users are not concerned about historical costs or current values, but their future profitability. Only investments with large value changes will affect returns. Since it is not easy to judge whether it is a permanent or temporary impairment, the possibility criterion should be adopted. However, considering the low professional quality of accounting personnel in China and insufficient information about various assets, the economic standards can be focused on when determining the impairment standards. After the time is ripe, the asset impairment standards will be further determined.

Provision for asset impairment

I. Bad debt provision

The enterprise shall conduct a comprehensive inspection of the receivables regularly or at least at the end of each year. It is expected that bad debts of various receivables may occur, and provision for bad debts shall be made for receivables that are not sure to be recovered. According to the "Enterprise Accounting System", enterprises can only use the allowance method to calculate bad debt losses. With this method, on the one hand, bad debt losses are estimated on a regular basis and recorded in asset impairment losses. On the other hand, a bad debt reserve account is set up. When bad debts actually occur, the bad debt provisions and receivables are written off, so that the Receivables are reflected as the net value after deducting estimated bad debts.

When withdrawing bad debt provisions, debit the "asset impairment loss" account and credit the "bad debt preparation" account. If the bad debt provision that should be withdrawn in this period is greater than its book balance, it should be drawn according to its difference; the difference that should be withdrawn less than the book balance should be debited to the "bad debt provision" account and credited to the "asset impairment loss" account.

For receivables that are truly uncollectible, the enterprise shall, upon approval, be used as bad debt losses, write off the bad debt provision withdrawn, debit the "bad debt preparation" account, and credit the "receivable account" and other subjects.

The bad debt loss that has been confirmed and resold, if it is recovered later, debit "Accounts Receivable" and other subjects based on the actual amount recovered, and credit the "Bad Account Preparation" subject; at the same time, debit the "Bank Deposit" subject, Record the accounts such as "Accounts Receivable".

Second, inventory prices

"Enterprise Accounting Standards-Inventory" stipulates: "At the end of the accounting period, inventory should be measured at the lower of cost and net realizable value." If the cost of inventory at the end of the period is lower than the net realizable value, no accounting treatment is required, and the inventory in the balance sheet is still Listed at the end of the period. If the net realizable value of the inventory at the end of the period is lower than the cost, the inventory depreciation loss must be recognized in the current period and the inventory depreciation reserve should be made.

At the end of each accounting period, compare the cost with the net realizable value to calculate the accrued reserve, and then compare it with the balance of the "inventory depreciation reserve" account. If the accrued amount is greater than the accrued amount, it shall be supplemented; otherwise, it shall be written off Some have been raised. When withdrawing and replenishing the inventory depreciation reserve, debit the "asset impairment loss" account and credit the "inventory depreciation reserve" account; write back or resell the inventory depreciation loss for the opposite accounting entry. However, when the value of the inventory for which the depreciation reserve has been accrued later recovers, the amount of its depreciation reserve should be reduced to zero as the balance of the "Inventory depreciation reserve" account.

Short-term investment price reserve

China's investment standards and corporate accounting systems require short-term investments to be valued at a lower cost and market price. At the end of the period, the cost of short-term investments is compared with the market price, and the lower one is used as the book value of the short-term investment. When the lower cost and market price are adopted, the enterprise may use its overall investment, investment category, or individual investment to calculate and determine the provision for the loss of depreciation.

When making provision for short-term investment depreciation, debit the "Investment income" account and credit "Short-term investment depreciation preparation" account; if the short-term investment's period-end valuation rebounds, the short-term investment depreciation should be written off within the scope of the original provision For preparation, debit the account for "short-term investment depreciation preparation" and credit the account for "investment income".

Provision for impairment of long-term investments

The investment guidelines require that companies should check the book value of long-term investments periodically or at least at the end of each year. If the recoverable amount of the invested unit is lower than the book value of the investment due to the continuous decline in market prices or changes in the operating conditions of the invested unit, provision for impairment shall be made. The long-term investment impairment provision shall be calculated and determined according to individual investment projects. When the impairment provision is made, debit: the "asset impairment loss" account, and credit the "long-term investment impairment reserve" account; The value has been restored and cannot be reversed in subsequent accounting periods. At the time of disposal, the balance of the "Long-term Investment Impairment Provision" account will be transferred out together.

Entrustment collection impairment provision

The enterprise accounting system stipulates that an enterprise shall conduct a regular inspection of the principal of the entrusted loan and measure it at the lower of the principal of the entrusted loan and the recoverable amount. The difference between the recoverable amount and the principal of the entrusted loan shall be provided for impairment. However, there is no separate account for the provision for impairment of entrusted loans. When accruing, debit the "investment income" account and credit the "entrusted loan-impairment provision" account. On the balance sheet, the principal amount of the entrusted loan and the net interest receivable less the provision for impairment losses are incorporated into short-term investment or long-term debt investment projects.

Provision for impairment of fixed assets

The enterprise shall inspect the fixed assets item by item at the end of the period or at least at the end of each year. If the recoverable amount is lower than the book value due to the continuous decline in market prices, or outdated technology, damage, long-term idle, etc., it shall be recoverable The difference between the amount and its book value is used as the provision for impairment of fixed assets. Provision for impairment of fixed assets shall be made on a per-asset basis. When accruing, debit: the "asset impairment loss" account, credit the "fixed asset impairment reserve" account; if the value of the fixed asset that has been accrued for impairment is restored, it will not be reversed in future periods. When assets are disposed of, their impairment provisions are transferred.

Provision for impairment of intangible assets

An enterprise shall check the ability of various intangible assets to bring economic benefits to the enterprise at the end of the period or at least at the end of each year. If the estimated recoverable amount is lower than its book value, it shall make provision for impairment.

At the end of the period, if the book value of the intangible assets held by the enterprise is higher than its recoverable amount, it should debit the "asset impairment loss" account and credit the "intangible asset impairment reserve" account according to its difference; if it has been accrued The value of the intangible assets provided for impairment has been restored and cannot be reversed in subsequent periods. It is transferred out when the intangible assets are disposed of.

Provision for impairment of construction in progress

The enterprise shall conduct a comprehensive inspection of the construction in progress at the end of the period or at least at the end of each year. If there is evidence that the construction in progress has been impaired, it shall make provision for impairment.

When an enterprise's construction in progress is impaired, debit the "Non-operating Expenditure" account, and credit the "Construction in progress depreciation reserve" account; if the value of the construction in progress that has been provided for the impairment of the body has been restored, the original Within the scope of value preparation, debit the account of "Provision for construction impairment" and credit the account of "non-operating expenses".

Asset impairment measurement

The international accounting standards and China's accounting standards for the measurement of asset impairment are based on the net sales price (or market price) as the measurement standard, which is somewhat defective.

First, the net sales price is based on voluntary transactions between buyers and sellers, and will be subject to interference from many external factors, such as supply and demand, inflation, and people's preference for new and old assets, so the price will deviate from its value at a certain point in time. . The use of assets is a long-term process, and the impairment value is determined after comparing the book value of the asset with its intrinsic value.

Secondly, the use of net sales price as a measurement standard fails to fully consider the nature of assets. The purpose of holding assets of an enterprise is not to sell, but to bring long-term economic benefits to the enterprise. The inflow of future economic benefits cannot be measured by the net sales price. The future economic benefits include risk factors, and the net sales price is the actual price at a certain point in time. It does not take into account the risk factor.

Thirdly, the comparison between the book value and the net sales price is the basis for the manager's decision on whether to retain or sell the asset. In fact, a company's retention of assets cannot simply consider whether the continued use of the asset will bring more estimated future cash flows and potential returns than the sale of the asset, and more importantly consider factors such as the special role of the asset in the production process that cannot be measured in currency. .

The present value of the expected future cash flows is an ideal measurement. It unifies the determination of the value of assets with the definition of assets and overcomes the problems arising from the use of net sales prices. Since the calculation of the present value of cash flows will cause some difficulties in calculating the amount of impairment, we can use the principle of asset evaluation to calculate the present value of future cash flows of assets using the income method. The prerequisite is to comply with the requirements of international accounting standards: the cash flow forecast should be based on the financial budget or forecast approved by management, and due to the detailed, clear and reliable financial budget of future cash flow over a period of more than 5 years or Forecasts are not easy to obtain, so the longest forecast period is 5 years. Taking into account the adverse impact of uncertainty in the estimation of forward data and the impact of technological progress on the economic life of assets, we can use the period that can predict cash flows as the profit period, which generally does not exceed 5 years. At the same time, both the asset pricing model can be used to determine the discount rate, and the risk discount rate and weighted capital cost can be used as the discount rate. In this way, the present value of future cash flows can be calculated and compared with the book value of the assets to determine the amount of impairment.

But in general, cash flow is the result of the combined action of multiple assets. It is difficult to determine the exact cash flow of a certain part of a similar production facility such as an assembly line in a modern enterprise. In order to solve this problem, the International Accounting Standards put forward the concept of cash-generating unit and interpreted it as the cash-inflow generated by the cash-generating unit only from continuous use is basically independent of the cash inflow generated by other assets or asset portfolio And identified as the smallest asset portfolio. " According to the principle of substance over form, a portion of a cash-generating unit is impaired, and the entire cash-generating unit cannot be recognized as impaired if it is not impaired as a whole. Because the impairment of a single asset in a cash-generating unit does not affect the overall cash output, it will not lead to a reduction in economic benefits and thus conforms to the principle of asset recognition that assets can bring future economic benefits. If the entire cash-generating unit is not impaired, the company can adopt the method of shortening the depreciation period or accelerating depreciation in accordance with the principle of soundness to make up for the loss of assets in a shorter period of time and enhance the company's ability to resist risks. If the entire cash-generating unit is impaired, the cash flow of the cash-generating unit should be estimated using the income method, and then the impairment amount should be distributed among the individual assets of the cash-generating unit.

The specific method is as follows: first, the depreciation amount of each asset is used as a proportion of the cash flow distribution; then, the present value of the cash flow of each asset is determined according to the profitable life of the asset and the expected return rate, and it is related to the book value of each asset Compare and determine the amount of impairment of individual assets; finally, allocate the amount of impairment of the cash output unit in accordance with the proportion of the amount of impairment of each asset, and determine the amount of impairment of the cash output unit to be allocated to each asset. This does not violate the essence of asset impairment, and is in line with the spirit of international accounting standards that encourage companies to recognize impairment as much as possible for individual assets.

Retrospective adjustments to asset impairment provisions

International accounting standards stipulate that asset impairment losses should be recognized as expenses in the income statement, and China's accounting standards also recognize the impairment of various assets as current expenses. Although this approach is simple and easy, it is possible to add the asset loss that should be included in depreciation to the expenses of a certain year at a time, blurring the difference between the two concepts of depreciation and impairment. If the impairment is used to make up for the loss of assets, it not only masks the long process of making up the assets during consumption, leaving a certain space for the company to adjust its profits, but it will also bring certain risks to the operation of the company. Therefore, in the process of formulating US accounting standards, it has been proposed to use different methods to measure different impairments. If the asset may be impaired due to depreciation without appropriate adjustments, retrospective adjustments shall be made; if the asset may be impaired due to a major change in use, the impairment difference may be directly included in profit or loss after comparison with relevant measurement standards . This is mainly considering that companies generally formulate depreciation policies for assets after inferring the future use of assets based on the situation. However, the changes in the external environment are highly unpredictable. It may happen that the book value of assets is greater than its actual value after a period of time. At this time, it is obviously not in line with the principle of income and expenses ratio to fully account for this difference in current expenses.

To this end, the loss of assets can be included in the appropriate year through retrospective adjustments to prevent enterprises from adjusting profits through asset impairment. In distinguishing impairments of different nature, retrospective adjustments shall be made to those assets that have been impaired due to factors that have occurred in the past and have been present for a long period of time (such as technological progress); 2. Infrequent events (such as asset damage, unpredictable events such as sudden changes in the economic and legal environment), because they are not the accumulated results of previous periods and do not have any impact on previous accounting, the resulting impairment can be calculated. Into the current profit and loss. Of course, retrospective adjustments have certain limitations. Enterprises use retrospective adjustments to account for asset impairment in previous years, which not only squeezes out moisture in assets, but also does not affect the profit figures for the current year, resulting in the phenomenon of transferring profits from previous years to the current period. However, as long as the cause of the impairment is reviewed, relevant measures are formulated, and retrospective adjustments to part of the impairment are more appropriate.

determine

China's accounting standards and international accounting standards have different opinions on determining the maximum amount of impairment losses to be reversed. China's accounting standards take the provision for asset impairment as the maximum limit, while international accounting standards take the carrying amount (the original value less amortization and depreciation) of the asset when no impairment loss has been recognised in previous years as the maximum limit. The handling of this issue by international accounting standards is in accordance with the principle of prudence. Because if the recoverable amount is greater than the carrying amount of the asset in the previous year when no impairment loss was recognized, then the book value of the asset after the return is greater than the carrying amount of the asset in the previous year when no impairment loss is recognized. This is equivalent to confirming the appreciation of assets, which is contrary to the purpose of preventing impairment of assets and making provision for impairment.

In addition, retrospective adjustments can be made to the reversal of asset impairment and are not recognized as current income. First of all, retrospective adjustments can prevent companies from using asset impairment to switch back to manipulate profits. Secondly, the reversal of asset impairment provisions has nothing to do with the operating activities of the current period, nor can it bring actual cash inflows to the enterprise. It is only a modification of the previous provision for impairment, so it cannot be included in current income. Switched back in previous years and this period.

Reversal of asset impairment

Reversal of asset impairment:

Some of the impairment of assets can be reversed, and some cannot be reversed:

(1) Some relatively short-term impairment or depreciation provisions can be reversed, mainly including inventory depreciation provisions, bad debt provisions, available-for-sale financial asset impairment provisions, held-to-maturity investment impairment provisions, and consumable biological asset depreciation provisions , Provision for loan loss, provision for impairment of unguaranteed residual value, provision for depreciation of surplus materials, provision for impairment of deferred income tax assets, long-term receivables-receivables for financial leases, etc.

(2) Some long-term impairment provisions cannot be reversed, mainly including long-term equity investment impairment provision, fixed asset impairment provision, intangible asset impairment provision, construction in progress impairment provision, engineering material impairment, productive organisms Provision for impairment of assets, provision for impairment of goodwill, provision for impairment of investment real estate that is subsequently measured using a cost model, provision for impairment of proved interests in oil and gas mining areas and wells and related facilities.