Sylvia Company has a longminusterm plant asset with the following information as of the end of the year: Net book value $87,500 Estimated future cash flows $70,000 Fair value $67,000 The amount of the impairment loss is:

Impairment loss : $20500

Explanation:

An impairment loss is a recognized reduction in the net book value (carrying value) of an asset which is triggered by a decline in its fair value. Impairment losses can occur due to a number of reasons such as:

1. Physical damage to the asset

2. Permanent reduction in market value

3. Early asset disposal

4. Legal issues against the asset

Business assets that have suffered a loss in value are given two tests to recognize and measure the amount of impairment loss:

1. Firstly, it should be identified whether the undiscounted cash flows of the asset are less than the book value of the asset. If the cash flows are less than the book value, the loss is measured. In this case, net book value is $87,500 whilst estimated future cash flows is $70,000. Hence, future cash flows are less than the net book value by an amount of $17,500.

2. The impairment loss is calculated by finding the difference between the book value and market value of the asset.

Impairment loss = Book value - Market value

= $87,500 - $67,000 = $20500

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