Impairment Loss Example: Two-Step Test & Entries | US GAAP

Calculate an impairment loss on equipment using the US GAAP two-step test. This worked example shows the recoverability test, the $3.2 million loss entry, depreciation after the write-down, and what happens when fair value later recovers. For intermediate accounting students and CPA FAR or CMA candidates studying long-lived assets. The equipment remains held and used in operations; this is an ASC 360 example, not an IAS 36 value-in-use calculation. WHY IS THE LOSS $3.2 MILLION? 1. Test recoverability: compare the $8 million carrying amount with $7 million of expected UNDISCOUNTED net cash flows. The carrying amount is not recoverable. 2. Measure the loss: $8 million carrying amount − $4.8 million fair value = $3.2 million impairment loss. The $1 million shortfall in step 1 identifies the recoverability problem; it is not the loss measurement. JOURNAL ENTRIES AND DEPRECIATION The lecture records: debit Loss on Impairment $3.2 million; credit Accumulated Depreciation $3.2 million. New carrying amount: $4.8 million. Assuming straight-line depreciation, zero residual value and four remaining years: $4.8 million ÷ 4 = $1.2 million per year. Annual entry: debit Depreciation Expense $1.2 million; credit Accumulated Depreciation $1.2 million. CAN THE LOSS BE REVERSED? For this asset held and used under US GAAP, a subsequent increase in fair value does not reverse the impairment. The lecture contrasts assets held for sale, which follow a separate fair-value-less-cost-to-sell model. Any later recovery under that model is limited to cumulative write-downs previously recognized under the held-for-sale model; reclassification does not undo a prior held-and-used impairment. STUDY CLARIFICATIONS Apply the recoverability test at the appropriate asset or asset-group level using cash flows from use and eventual disposal. A discounted-cash-flow valuation must use appropriate fair-value assumptions; it is not automatically the same as IFRS value in use. The discussion about similar intangible-asset testing concerns finite-lived intangibles. Indefinite-lived intangibles and goodwill have different impairment models. The held-for-sale and IFRS comparisons here are brief, not full lessons. CHAPTERS 00:00 Equipment impairment example and assumptions 01:11 Step 1: test recoverability 02:01 $8 million book value versus $7 million cash flows 02:57 Step 2: measure the loss using fair value 04:00 Record the $3.2 million impairment entry 04:33 Depreciation question and study resources 05:39 Calculate depreciation after impairment 06:59 What if fair value rises to $5.3 million? 07:20 No reversal for assets held and used 07:49 Held-for-sale recovery comparison 08:51 Check the asset type and accounting model 09:29 Practice and closing review CONTINUE STUDYING Depreciation, Impairment & Depletion:    • Depreciation, Impairment & Depletion | Int...   Intermediate Accounting Course:    • Intermediate Accounting Course (I & II) | ...   More accounting lectures and practice: https://farhatlectures.com #ImpairmentLoss #USGAAP #CPAExam