Impairment vs. Revaluation Downwards

Attribute	Impairment	Revaluation Downwards
Definition	Reduction in the recoverable amount of an asset below its carrying amount	Decrease in the fair value of an asset below its carrying amount
Recognition	Recognized as an expense in the income statement	Recognized as a reduction in the revaluation surplus in equity
Frequency	Impairment is recognized when there is an indication that the asset's carrying amount may not be recoverable	Revaluation downwards is recognized when there is a significant decrease in the fair value of the asset
Impact on Financial Statements	Reduces the carrying amount of the asset and results in a decrease in profit or increase in loss	Reduces the revaluation surplus in equity and does not impact profit or loss

Introduction

Impairment and revaluation downwards are two accounting concepts that are used to adjust the value of assets on a company's balance sheet. While both concepts involve a decrease in the value of assets, they are used in different circumstances and have different implications for a company's financial statements.

Impairment

Impairment occurs when the carrying amount of an asset on the balance sheet exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell or its value in use. When an asset is impaired, its carrying amount is reduced to its recoverable amount, and the difference is recognized as an impairment loss in the income statement.

Impairment is typically triggered by a significant decline in the market value of an asset, changes in economic conditions, or other factors that indicate the asset may not be able to generate the expected cash flows. Impairment is considered a non-reversible adjustment, meaning that once an asset is impaired, its value cannot be restored to its original amount.

Impairment is a conservative accounting practice that ensures assets are not overstated on the balance sheet. By recognizing impairment losses, companies provide more accurate and transparent financial information to investors and stakeholders.

Impairment is required under accounting standards such as IFRS and GAAP to ensure that assets are not carried at values higher than their recoverable amounts. Companies are required to regularly assess their assets for impairment and make adjustments as necessary to reflect their true economic value.

Impairment can have a negative impact on a company's financial statements, as it reduces the value of assets and can result in lower reported profits. However, impairment is necessary to ensure that assets are not overstated and that financial statements provide a true and fair view of a company's financial position.

Revaluation Downwards

Revaluation downwards is a concept that allows companies to adjust the value of assets on their balance sheet to reflect a decrease in their fair value. Unlike impairment, revaluation downwards is not triggered by a specific event or indicator, but is a discretionary adjustment that companies can make based on their assessment of an asset's value.

Revaluation downwards is typically used when there is a significant and sustained decrease in the market value of an asset, but the asset's carrying amount is still higher than its fair value. Companies may choose to revalue assets downwards to ensure that their balance sheet reflects the true economic value of their assets.

Revaluation downwards is a reversible adjustment, meaning that if the market value of an asset increases in the future, companies can choose to revalue the asset upwards to reflect the increase in value. This flexibility allows companies to adjust the value of assets on their balance sheet to reflect changes in market conditions.

Revaluation downwards can have a positive impact on a company's financial statements, as it allows companies to reflect the true economic value of their assets and provide more accurate financial information to investors and stakeholders. However, revaluation downwards is a discretionary adjustment and companies must exercise judgment in determining when to revalue assets downwards.

Revaluation downwards is not required under accounting standards such as IFRS and GAAP, but companies may choose to revalue assets downwards to ensure that their financial statements provide a true and fair view of their financial position. Revaluation downwards is a useful tool for companies to adjust the value of assets on their balance sheet to reflect changes in market conditions.

Comparison

• Impairment is triggered by a specific event or indicator, such as a significant decline in the market value of an asset, while revaluation downwards is a discretionary adjustment that companies can make based on their assessment of an asset's value.
• Impairment is a non-reversible adjustment, meaning that once an asset is impaired, its value cannot be restored to its original amount, while revaluation downwards is a reversible adjustment that allows companies to adjust the value of assets based on changes in market conditions.
• Impairment is required under accounting standards to ensure that assets are not carried at values higher than their recoverable amounts, while revaluation downwards is not required but can be used by companies to reflect changes in the fair value of assets.
• Impairment can have a negative impact on a company's financial statements, as it reduces the value of assets and can result in lower reported profits, while revaluation downwards can have a positive impact by allowing companies to reflect the true economic value of their assets.
• Impairment is a conservative accounting practice that ensures assets are not overstated on the balance sheet, while revaluation downwards provides companies with flexibility to adjust the value of assets based on changes in market conditions.

Conclusion

Impairment and revaluation downwards are two accounting concepts that are used to adjust the value of assets on a company's balance sheet. While impairment is triggered by specific events and is a non-reversible adjustment, revaluation downwards is a discretionary adjustment that allows companies to reflect changes in the fair value of assets. Both concepts have implications for a company's financial statements and provide companies with tools to ensure that their financial statements provide a true and fair view of their financial position.