Asset impairment explained

What does asset impairment mean, and which types of assets could run the risk of getting impaired?

⏱️TIMESTAMPS⏱️
0:00 Introduction
0:07 Meaning of impaired
0:32 Asset impairment explained
1:11 Cash impairment
1:25 Receivables impairment (bad debt)
1:49 Inventory impairment (obsolescence)
2:24 Fixed asset impairment
2:52 Goodwill impairment
3:35 Asset impairment summary

Let’s start off with reviewing the word impaired first. There are warning labels on certain medications stating that the medications might negatively affect, or impair, your driving. There are warning labels in high noise areas mandating the use of hearing protection. Once your driving skills or hearing ability are impaired, it means that they are weakened, diminished, or damaged.

That same concept could apply to assets in your company. The arrow on the left has low value at the bottom and high value at the top. If the carrying value or book value of an asset is higher than the recoverable amount of the asset, then the company should be recognizing an impairment loss.

Which types of assets could be impaired? Well, let’s review the balance sheet, which is an overview of what a company owns (on the left) and what a company owes (on the right) at a point in time. Cash, accounts receivable, inventory, fixed assets, and goodwill, are common asset categories on a company’s balance sheet. Any of these could be impaired!

Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the #business and #accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!