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What Is a Reversal of Impairment?

A reversal of impairment occurs when an asset's recoverable amount exceeds its carrying value, indicating an increase in the asset's worth. This positive shift allows companies to adjust their financial statements, reflecting newfound potential in previously undervalued assets. It's a beacon of financial resilience. Wondering how this can impact a company's balance sheet? Let's explore the ripple effects together.
A. Leverkuhn
A. Leverkuhn

Reversal of impairment is a situation where a company can declare an asset to be valuable where it has previously been declared a liability. In general, asset impairment indicates that an asset costs more to a business than it is worth. There are times, however, when this situation changes and the asset becomes valuable.

Generally, there are specific protocols according to national finance laws for companies that want to declare an asset impaired. These rules are different for different classes of assets. For instance, a trademark or patent has its own cost and profit factors that will determine whether it is impaired. The criteria for physical machinery or large physical assets are much different.

Woman holding a book
Woman holding a book

A wide variety of companies in different industries approach asset impairment, and reversals, in different ways. For a tech company that focuses on intangible products and intellectual ownership, a reversal of impairment might be related to abstracts like brand value or external valuations affecting a stock price. For companies that produce physical goods, some basic math can help managers determine whether a physical asset, such as a piece of machinery or a specific manufacturing facility, has become impaired or whether a reversal has occurred.

In reversals of impairment, the company has come to the conclusion that an asset is no longer a burden to its profit margin. This company then needs to report to the applicable regulators or tax offices that a reversal has occurred. Many of the regulations and criteria for such a situation are designed to apply to a company’s specific annual tax filing or other fiscal accounting reports. The valuation and identification of a change in value also varies according to the different nations and regions of the world that have their own corporate accounting laws and systems.

It’s important to note that some types of impaired assets cannot be reversed. The company’s leadership must stay apprised of how national tax offices or laws understand and provide for a reversal of impairment. For companies that operate internationally, this issue may become even more complicated, where the company may need to operate under the laws of the nation where it is based, but may also have to provide values for an asset in terms of the currency of the country where individual offices are located.

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