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If the fair value is less than carrying value (impaired), the goodwill value needs to be reduced so the carrying value is equal to the fair value. The impairment loss is reported as a separate line item on the income statement, and new adjusted value of goodwill is reported in the balance sheet. [10]
The value inherent in its workforce, part of the intellectual capital of a company, is always ignored. When intangible assets and goodwill are explicitly excluded, the metric is often specified to be tangible book value. In the United Kingdom, the term net asset value may refer to the book value of a company.
The fair value adjustment can relate to any assets or liabilities recorded on the balance sheet (or off-balance sheet items that should be recorded). One usual suspect can be fixed assets where it is likely that for example the book value of property can deviate significantly from its fair market value.
For example, assume a company has an investment in Company A bonds with a carrying amount of $37,500. If their market value falls to $33,000, an impairment loss of $4,500 is indicated and the impairment cost calculated as follows: $ $ = $ This is recorded as a loss of $4,500 in the income statement.
Amortization is recorded in the financial statements of an entity as a reduction in the carrying value of the intangible asset in the balance sheet and as an expense in the income statement. Under International Financial Reporting Standards , guidance on accounting for the amortization of intangible assets is contained in IAS 38. [ 1 ]
In finance, a revaluation of fixed assets is an action that may be required to accurately describe the true value of the capital goods a business owns. [1] This should be distinguished from planned depreciation, where the recorded decline in the value of an asset is tied to its age.
An impairment loss is determined by subtracting the asset's fair value from the asset's book/carrying value. Trademarks and goodwill are examples of intangible assets with indefinite useful lives. Goodwill has to be tested for impairment rather than amortized. If impaired, goodwill is reduced and loss is recognized in the Income statement.
An appropriate capitalization rate is applied to the excess return, resulting in the value of those intangible assets. That value is added to the value of the tangible assets and any non-operating assets, and the total is the value estimate for the business as a whole. See Clean surplus accounting, Residual income valuation.