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Why you can’t always count on the book value of property and equipment

The market value of property and equipment often exceeds book value, especially for fixed assets that appreciate (rather than depreciate) in value or if your company uses accelerated depreciation methods. But the reverse sometimes occurs, too. When book value exceeds market value, a write-off may be required under U.S. Generally Accepted Accounting Principles.

Recording impairment

Companies normally record fixed assets at historic cost and then depreciate them over their useful lives. But sometimes an asset’s book value (historic cost less accumulated depreciation) overstates its fair value. Fair value is “the price that would be received to sell an asset … in an orderly transaction between market participants at the measurement date,” according to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures.

To the extent that book value exceeds fair value, the value of an asset is “impaired.” And you must report the impairment loss as part of your income from continuing operations. Impairment losses also reduce the carrying value of the impaired asset on your balance sheet. Once impairment has occurred, the FASB prohibits the upward revaluation of the asset in subsequent periods.

Testing for impairment

Companies aren’t required to test property and equipment for impairment every accounting period. Rather, testing should occur on a consistent basis — say, every three to five years. Possible reasons for interim testing include changing market conditions, inaccurate useful lives or overpaying for an acquisition.

Unfortunately, there are many reasons management may delay or deny impairment. An impairment loss lowers earnings and the value of fixed assets and, therefore, raises a red flag to investors and lenders. Additionally, impairment testing may be outside the comfort zones of some internal accounting personnel.

Beyond impairment

Your balance sheet also may be “off” if the fixed asset ledger isn’t accurate. For example, you may no longer physically possess an asset that’s been stolen by an employee. Or an asset may be idle, damaged or obsolete.

Many businesses struggle with reporting property and equipment. We can help you get a handle on managing, depreciating and reporting impairment for these valuable assets. Contact us for more information.

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