03-21-2005, 06:08 AM
The concept of impairment is at the heart of recognition principle of assets.
Certain criteria needs to be fulfilled to recognise an asset and one primary criteria is its ability to generate future cashflows.
If an asset cannot generate cashflow it should be written down to realisable value.
Why? Because we have certain principles in accounting such 'matching principle' which mean that recognition of costs should match with recognition of revenue from period to period. Therefore if certain assets do not provide benefit (cashflows) for more than one accounting period, we have to charge these to income in the period when the benefit is accrued.
Now coming back to disadvantages of impairment. Disadvantages of impairment is a misnomer because if we don't perform impairment review, we do not follow proper accounting.
However notwithstanding everything said above, impairment means accelerated recognition of asset costs to income which mean unavailability of hidden reserves when assets are disposed off; comparitively high asset turnover ratios; low breakup values and a balance sheet which is compartively more volatile.
http//s4.invisionfree.com/AccountingWorld/
Certain criteria needs to be fulfilled to recognise an asset and one primary criteria is its ability to generate future cashflows.
If an asset cannot generate cashflow it should be written down to realisable value.
Why? Because we have certain principles in accounting such 'matching principle' which mean that recognition of costs should match with recognition of revenue from period to period. Therefore if certain assets do not provide benefit (cashflows) for more than one accounting period, we have to charge these to income in the period when the benefit is accrued.
Now coming back to disadvantages of impairment. Disadvantages of impairment is a misnomer because if we don't perform impairment review, we do not follow proper accounting.
However notwithstanding everything said above, impairment means accelerated recognition of asset costs to income which mean unavailability of hidden reserves when assets are disposed off; comparitively high asset turnover ratios; low breakup values and a balance sheet which is compartively more volatile.
http//s4.invisionfree.com/AccountingWorld/
