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Understanding impairment testing for long-lived tangible assets (plant, machinery & equipment)

What is the impairment for tangible assets?

Impairment is characterised as the permanent depreciation of an asset's value.

Why is the impairment test of assets important?

There's a compelling need to periodically examine assets for impairment (either throughout or after the accounting period). This ensures that the value of the assets is not exaggerated on the balance sheet.

What constitutes 'periodic' for an impairment test?

Assets with an indefinite lifespan, both tangible and intangible, must undergo impairment testing at least once annually.

As for long-lived tangible assets such as plant, machinery and equipment, the requirement is to test for signs of impairment throughout or at the end of the accounting period.

What are some noteworthy impairment indicators or triggers?

Here are some key indicators that may signal impairment:

  • Political, social, technological, legal or economic downturns relevant to the asset or Cash Generating Unit (CGU)
  • Physical harm to the asset (beyond normal wear and tear)

Given that these triggers have become more common, performing impairment analysis as frequently as reasonably achievable is prudent to prevent overstatement.

Why should we conduct asset impairment tests when we carry out annual depreciation?

Although both concepts refer to a decrease in an asset's value, the two concepts are quite distinct.

Depreciation is a planned and systematic process over the asset's estimated lifespan, while impairment is unforeseen and can occur at any point in the asset's lifespan.

How do you test long-lived assets for impairment?

Who is capable of making impairment tests for long-lived assets?

ValuStrat is one of the few firms that can help you with this specialist service, as we offer this proposition through synergies between our industrial consulting and strategic advisory teams, ensuring that your financial statements accurately reflect the present state of affairs.