Question 5: Asset impairment What is an impairment of assets? An asset is impaired when its carrying amount is greater than its recoverable amount. The carrying amount of an asset is the amount shown in the accounting records. The recoverable amount of an asset is in fact the asset's 'real value" Impairment of a fixed asset is an abrupt decrease of its fair value due to damage, obsolescence etc. When impairment of a fixed asset occurs, the business has to decrease its value in the balance sheet and recognize a loss in the income statement. - Example: On January 1, 2005 Zarlascht Inc. purchased a building for $2 million. Its estimated useful life at that date was 20 years and the company uses straight line depreciation methood On December 31, 2009 the government embarked on a plan to construct a fly-over adjacent to the building and the related installation reduced the access to the building thereby decreasing the value of the building. The company estimated that it can sell the company for $1 million but it has to incur costs of $50,000. Alternatively, it if continues to use it the present value of the net cash flows the building will help in generating is $1.2 million. Task: Determine the impairment of the building, if any? o