Impairment Valuation

As tangible asset valuers, we understand the critical importance of accurate financial reporting for your company's long-term health and stakeholder confidence. We specialize in providing comprehensive impairment valuation services, offering clarity and precision in complex financial landscapes.

Understanding Asset Impairment

An asset is considered impaired when its carrying amount, as recorded on the balance sheet, exceeds its recoverable amount or fair value. This reduction in value can be abrupt and significant, often stemming from unforeseen circumstances.

For tangible assets, such as property, plant, equipment (PP&E), machinery, buildings, and even right-of-use (ROU) assets related to leases, impairment losses can have a substantial impact on a business's reported asset base and profitability. Unlike certain intangible assets like goodwill, tangible assets are not assessed for impairment annually unless specific events or changes in circumstances, known as "triggering events," indicate a potential decline in value.

Common indicators that may signal the need for an impairment review include:

• Significant market price declines.

• Adverse changes in the economic, legal, or business environment.

• Evidence of physical damage or obsolescence.

• Changes in the asset's use or physical condition, such as it becoming idle or plans for restructuring operations.

• Operating losses or negative cash flows from the asset.

The Impairment Valuation Process for Tangible Assets (U.S. GAAP)

Under U.S. Generally Accepted Accounting Principles (U.S. GAAP), the impairment assessment for tangible and finite-lived intangible assets involves a two-step quantitative test at the "asset group" level:

1. Recoverability Test (Step 1): The carrying amount of the asset group is compared to the undiscounted future cash flows expected to be generated from its continued use and eventual disposal. If these undiscounted cash flows are less than the carrying amount, it indicates that the asset may not be recoverable, and the process moves to the second step. If the undiscounted cash flows are greater, no impairment is recognized, even if the fair value is lower.

2. Measurement of Loss (Step 2): If the asset group fails the recoverability test, the impairment loss is measured as the difference between the asset group's carrying amount and its fair value. This fair value is determined based on assumptions that market participants would use, often considering the highest and best use of the asset. The impairment loss is then allocated pro rata among the long-lived assets within the asset group, ensuring that no individual asset's carrying amount is reduced below its own fair value (if determinable).

It is important to note that impairment losses recognized for tangible assets under U.S. GAAP cannot be reversed in future periods.

Why Expert Valuation Matters

Impairment testing is a complex undertaking that requires significant judgment and detailed estimates. It involves projecting future cash flows, selecting appropriate discount rates, and comparing different valuation metrics. Navigating these intricacies demands a deep understanding of accounting standards, valuation methodologies, and market dynamics.

Engaging experienced valuation experts is crucial to:

• Ensure Accuracy and Reliability: Professional valuers apply rigorous, defensible methodologies to determine fair values and recoverable amounts, providing confidence in your financial statements.

• Maintain Compliance: Experts help ensure adherence to complex accounting standards, mitigating the risk of audit deficiencies and regulatory scrutiny.

• Support Strategic Decision-Making: Accurate impairment valuations offer transparent insights into asset values, aiding internal decision-making and enhancing stakeholder trust.

We are dedicated to helping our clients accurately assess the value of their tangible assets through meticulous impairment valuation, providing the insights necessary to reflect true financial positions and support informed strategic choices.