Question

Walkin Inc. is considering the write-down of its long-term plant because of a lack of profitability. Explain to the management of Walkin how to determine whether a write-down is permitted.

Short answer

Answer

To determine whether an asset is impaired, companies review the asset for indications of impairment; that is, a decline in the asset’s cash-generating ability through use or sale.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Impairment

Impairment refers to a reduction of the market value of fixed or intangible assets, indicative of a reduction in the quantity, quality, or market value of an asset. The idea is that an asset should never be reported in a business's financial statements above the maximum amount that could be recouped through its sale.

Explanation to the management of Walkin on how to determine whether a write-down method is permitted or not.

Companies examine assets on a yearly basis for signs of impairment, such as a deterioration in the asset's capacity to generate cash through use or sale, to decide if it is impaired. An asset is impaired if the recoverable value is less than the carrying amount.

The impairment loss is calculated as the difference between an asset's carrying value and its recoverable value. The greater fair value minus costs to sell or value-in-use is the recoverable amount of assets.