Difference Between Amortization and Impairment

A firm has a number of assets which include fixed assets that are used in the production of goods and services, like current assets that can be used to cover to pay daily expenses and intangible assets like goodwill, patent, trademark, copyright etc.

In the balance sheet, assets are recorded at their cost value that is why it needs to be customized to their market value.
Asset impairment and amortization both are theories to customize intangible asset's cost to its market value.


What is Impairment?

  • The word impairment is normally related to long-term intangible assets and its market value lowered significantly.
  • If expected cash flows from the asset are less than the asset's carrying amount, an impairment loss must be reported and the sum of an impairment loss is estimated by deducting it from the carrying value.
  • An asset is written down to its market value or it is sold and if asset losses the value it needs to be written down as an impairment loss.
  • Once an asset is impaired, there is a little possibility of the asset to write up. So, it must be evaluated thoroughly before putting it as an impairment asset.
  • For a company, it is necessary to calculate and check regularly the value of asset impairment and then decide to write off impairment.

For example:

A company has invested a large amount of money in the food packing plant and due to certain unfavourable circumstances; there is a drop in the value of the plant.

Reasons for the impairment

1) An asset becomes out-dated or an old-fashioned
2) An asset do not meet the regularly standards
3) Due to some reasons, an asset damaged
4) Due to change in market conditions and preferences

What is Amortization?

  • Amortization is a regular decrease in the value of an intangible asset or the manner in which to pay off a debt over a period of time by periodic payments.
  • Amortisation generally related to the expenses of intangible assets like goodwill, patents, copyrights, and trademarks etc. to show its decreased value as a result of over a period of time.
  • There are various reasons for being a decreased value of intangible assets like consumption or an out-dated.
  • Amortization is a method which is used to deduct the fair market value of an intangible asset.
  • When an asset is amortized, its cost is protected over a period of time that an asset is used to show the fair value of it.

For Example:

A company has obtained a new patent for the goods or services for a time period. A company amortizes it by dividing the cost involves in producing the product over a life of the patent and every portion of the expense is recorded in the income statement and deducted from the cost.

Difference between Impairment and Amortization

Meaning

  • The word impairment is normally related to long-term assets and its market value lowered significantly.
  • Amortization is a regular decrease in the value of an intangible asset or the manner in which to pay off a debt over a period of time by periodic payments.

Asset Adjustment

  • In impairment, the value of a company's asset reduces over a period of time and that is why it needs to be customized at their fair market value.
  • In amortization, the value of a firm's asset reduces in regular payments from the beginning at its fair market value.

Circumstances

  • Impairment occurs when the value of an asset reduces suddenly which cause damage to an asset and it becomes out-dated any other things.
  • Amortization occurs when the consumption of a product for a limited period of time and it is a systematic plan to write off an intangible asset over a period of time at their market value.

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