Explanation :
Most intangible assets like goodwill or patents are amortized over their estimated useful lives. Most of the time an intangible asset’s useful life is defined legally, but not always. Some patents legally expire after 20 years. These patents would obviously be amortized over 20 years. Other intangible assets like copyrights are good for the lifetime of the author plus 70 years. These copyrights would be amortized over a much longer period of time.
In a nutshell :
- Impairment can occur as the result of an unusual or one-time event, such as a change in legal or economic conditions, a change in consumer demand, or damage that impacts an asset.
- Assets should be tested for impairment regularly to prevent overstatement on the balance sheet.
- Impairment exists when an asset's fair value is less than its carrying value on the balance sheet.
- If impairment is confirmed as a result of testing, an impairment loss should be recorded.
- An impairment loss records an expense in the current period that appears on the income statement and simultaneously reduces the value of the impaired asset on the balance sheet.
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