Your dear friend runs his own business. He expanded into a bigger location and recently hired a professional accountant. Before the hire, he ran the business out of his basement and did his own bookkeeping using a cheap software system.

After reviewing the most recent accounting records, the new accountant told your friend that he had incorrectly recorded the recent exchange of property (still during this fiscal year) and it would need to be corrected in his financial records. The accountant said the exchange of property had no commercial substance, and he incorrectly reported a gain on the exchange. The accountant also is concerned that there will be some impairment issues due to assets that were damaged during the move to the new business location.

Your friend emails you to ask your help in explaining some of the accountant's information. He has several key questions that center around two terms: commercial substance and impairment. His key concerns are:

Why does his exchange of equipment have no commercial substance? It's his business equipment! Do they think he's using it personally or something?

What is the impairment? Won't the damaged asset just sell for a loss later? Why do they have to adjust the value now?

He would appreciate any advice you can give. He can always trust you to explain hard concepts to him in layman's terms, none of that technical accounting lingo!

Your 50 points will be assessed based on:

10 points acceptable grammar/format (email)

10 points audience (layman's terms)

10 points correct explanation for commercial substance

10 points correct explanation for impairment

10 points (5 points each) for links to more information; one link for each of the two terms; the links should be credible, but understandable to a nonaccountant