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An impaired asset is any asset that current has a market value that is less than the value carried in the owner's accounting records. The term is most commonly used to refer to assets owned by a company that carry a higher value of the corporate balance sheet than could be realized by selling those assets in the open market. The reference to impairment of the asset notes the difference between the two and provides the basis for engaging in what is known as writing down the book value of that asset.
The concept of an impaired asset is common with just about every business model. The need to make some sort of adjustment between the value currently carried in the accounting books and the market value can occur with a number of different assets. For example, a company may find it necessary to declare certain portions of its accounts receivables to be impaired, owing to outstanding invoices that have aged past a certain date. Some long-term assets that experience depreciation over time may also be included in this category, especially if unanticipated factors should lead to an increased rate of depreciation.
One of the characteristics of any type of impaired asset is that there is no reasonable hope that the market value of that asset will ever begin to appreciate once more. In the case of receivables that have been written down owing to the decreased potential of ever collecting on them, those invoices are not considered impaired until all reasonable efforts to collect those balances have occurred and collection effort has been placed with an outside firm. In the event that a collection agency is ever able to recoup a portion of the amount owed, that amount can be entered into accounting records as income, but will not lead to a reversal of the impairment of that asset.
The ability to declare a holding as an impaired asset is helpful to businesses, in that the process of writing down the value of assets means the total worth of those companies is not considered inflated. By more accurately expressing the value of those assets, the company can often take advantage of tax breaks associated with the depreciation, as well as present what is considered fair value accounting to anyone who is interested in acquiring the business. Even if there are no plans to sell, accurately tracking changes in value due to depreciation and other relevant factors and identifying each impaired asset on an annual basis can provide owners with a more realistic perception of the resources on hand to keep the business operating over the long term.