An example can better clear this up: Big Company acquired 40% of the Small Company for $40,000. Certain assets with indefinite lives require an annual test for impairment. Dr Revaluation surplus (B/S account) Recoverable Amount of the asset < Carrying amount (Net Book Value). In this article, we review when impairment is considered to have occurred, how impairment differs from revaluation (discussed earlier), and how to measure the impairment amount. | {{course.flashcardSetCount}} first two years of college and save thousands off your degree. Intangible assets are subsequently measured in a very similar way as property, plant and equipment. Study.com has thousands of articles about every Debit a "Loss" account and credit the intangible asset equal to the impairment amount. Because goodwill impairment is closely tied to the value of a company and its assets, a valuation expert is critical to this process. On the other hand, book value, or carrying amount, is the amount you paid for the asset, minus depreciation. Value in Use: Present Value of future net cash flows obtainable from the asset (before tax). Revaluations for impairment are required for each reporting period, which is usually annually. Yusuf has taught Science and Mathematics at school level and Finance and Economics at University level. study - Definition, Speed & Network, IT Project Risk Management: Framework & Process, What is Security Management? Sociology 110: Cultural Studies & Diversity in the U.S. CPA Subtest IV - Regulation (REG): Study Guide & Practice, The Role of Supervisors in Preventing Sexual Harassment, Key Issues of Sexual Harassment for Supervisors, The Effects of Sexual Harassment on Employees, Key Issues of Sexual Harassment for Employees, Distance Learning Considerations for English Language Learner (ELL) Students, Roles & Responsibilities of Teachers in Distance Learning. An impairment loss makes it into the "total operating expenses" section of an income statement and, thus, decreases corporate net income. where the carrying value exceeds the sum of undiscounted cash flows, recognizing any excess of carrying value over the fair value of the asset as the impairment loss. courses that prepare you to earn The following impairment standards apply to property, plant and equipment, intangible assets, and investments which are carried at amortized cost (addressed in a later article). Using the previous goodwill example, for instance, debit "Loss from Impaired Goodwill" for $35,000 and credit "Goodwill" for the same amount. This will be a debit to an impairment loss account and a credit to the intangible assets account. The guidance prohibits a subsequent reversal of a recognized impairment loss. Not sure what college you want to attend yet? Select a subject to preview related courses: Hence, the total impairment for the Small Company reported will be $23,000. Impairment loss is recognized immediately in P&L (unless the asset is carried at revalued amount) Thus, entries would be: Dr Impairment losses a/c (P&L account) Cr Asset account a/c (Balance sheet account) If the asset is carried at revalued amount, impairment loss is treated as a reduction in revaluation gain. It reports the prorated profits and assets for the investors. Impairment Definition: Impairment occurs when an asset devalues and is no longer worth its carrying amount. This lesson describes the equity method and the requirements for it. The general threshold for impairment, as described under generally accepted accounting principles (GAAP), is a lack of recoverability of the net carrying amount. In the year after investment, the Small Company earned $10,000 in income and paid $2,000 in dividends. The new carrying amount of the intangible asset is its former carrying amount, less the impairment loss. These groupings are called “Cash Generating Units” and are covered in the next article. Impairment disclosures for intangibles with indefinite life and An impairment loss takes place when a company makes a judgment call that the carrying value of an intangible asset on the company balance sheet is less than fair value, or what an unpressured person would pay for the asset in an open marketplace. Make an adjusting journal entry to reflect the impairment. If any such indication exists, you need to estimate the recoverable amount of the asset; Regardless of if there are any indications of impairment, you must test the following for impairment on an annual basis:. Get the unbiased info you need to find the right school. Traditional College, Tech and Engineering - Questions & Answers, Health and Medicine - Questions & Answers, Working Scholars® Bringing Tuition-Free College to the Community, when presenting investments in consolidated financial statements that have not used the consolidation method for investments in investee, in parent company financial statements that are unconsolidated, a standstill agreement where control might be surrendered, a situation in which another investor or group has a controlling majority, The fair or market value falls below the book value or the carrying value of the investment, This fall in value is considered to be permanent and not likely to be reversed in short term, in cases of unconsolidated parent company financials. If the asset‘s carrying amount is considered not recoverable, … The ASPE standard recognizes an impairment as a much more terminal event, and has a different accounting treatment. The standard also prescribes the circumstances for the reversal of impairment loss and related disclosures required. Disclosures pertaining to impairment loss/reversal for intangible assets re same as discussed in the PPE section and this should be provided for each class of intangible. Create an account to start this course today. The equity method is not applicable even if the ownership is between 20% to 50% in: The equity method reports the prorated profits and assets from the investors. 2. This discount rate should be before tax. Accounting for an intangible asset as a purchased patent (technology related) where its impaired and required to determine its fair value based on … Market Value of Investment = Amount Paid / Share Acquired=$40,000 / 40%=$100,000, Goodwill = Market Value - Book Value = $100,000 - $100,000 = $0, Final Book Value = Initial Book Value + Percentage investment * (Net Income - Dividends Paid)Initial Book Value = 40% * $100,000 = $40,000Final Book Value = $40,000 + 40%($10,000 - $2,000)=$43,200. 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Sciences, Culinary Arts and Personal Some triggering events that may result in impairment are – adverse changes in the general condition of the economyEconomicsCFI's Economics Articles are designed as self-study guides to learn economics at your own pace. Under US GAAP, an asset‘s carrying amount is considered not recoverable when it exceeds the undiscounted expected future cash flows. However, impairment can only decrease the value of the asset. {{courseNav.course.mDynamicIntFields.lessonCount}} lessons IAS 36 requires that both intangible assets with an indefinite useful life (and any intangibles not yet ready for their intended use) and goodwill be tested for impairment at least annually. Quiz & Worksheet - What is Computer Software? The intangible asset with infinite useful life should be tested for impairment one per year or whenever there is indicator that asset recovery amount may not be recoverable. Impairment describes a permanent reduction in the value of a company's asset, such as a fixed asset or intangible, to below its carrying value. Methodology – Quantitative analysis of a panel data sample of 80 companies listed in the Lisbon and Madrid Stock Exchange (2007-2011) was carried out. Any change in income, assets, or equity is reported likewise in the investors and the investee companies. Calculate the impairment loss in total for the Small Company for the second year and corresponding loss to be recognized in the income statement of the Big Company. Impairment review is required each year to assess whether there are indications that impairment might have occurred. To learn more, visit our Earning Credit Page. Intangible Assets Accounting (Impairment Testing, ... Impairment Loss Accounting (Impairment Of Assets Held For Use Vs Intended For Disposal) - … For most assets, we do not need to test for impairment yearly. Now assume that after a year of operations, the value of the investment in the Small Company falls to $80,000 due to the pandemic. Identification of the Impairment. more Financial Statement Analysis and career path that can help you find the school that's right for you. Impairment = carry amount – recoverable amount IAS 36 seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. - Definition, Principle, Measurement & Examples, Calculating the Carrying Amount of Fair Value Investments, Calculating Income Gains & Losses of Fair Value Investments, Calculating Investment Income Recognized in Net Income of Fair Value Investments, Measuring Impairment Losses on Investments Reported at Fair Value, Amortized Cost Investments: Eligibility & Carrying Amount Calculation, Measuring Impairment Losses on Amortized Cost Investments, Calculating & Recording the Carrying Amount of Equity Method Investments, Carrying Amount of Finite-Lived Intangible Assets: Calculation & Records, Carrying Amount of Goodwill & Indefinite-Lived Intangible Assets: Calculation & Records, CPA Subtest III - Financial Accounting & Reporting (FAR): Study Guide & Practice, Biological and Biomedical basis, and for other assets where impairment is tested only when there is an indication of impairment. These include: 1. obsolescence due to new technological changes, 2. decline in performance i.e. At the end of each reporting period, you need to assess whether there is any indication that an asset may be impaired. The share of impairment reported on the Big Company income statement will be: 40% * $23,000=$9,200. The company reports the impairment loss as an expense on the income statement, which ultimately reduces net income for the year. This standard provides guidelines to be followed by the entity to make sure that its assets are notstated atmore than its recoverable value. - Systems & Applications, IT Requirements Documents: Definition, Templates & Examples. IFRS (IAS 36) insists we need to test for impairments at each reporting period in addition to when there are triggers for impairment. As the name suggests, the value of the investment is reflected in the balance sheet. Anyone can earn Earn Transferable Credit & Get your Degree. All other trademarks and copyrights are the property of their respective owners. The impairment loss is measured by the amount that the carrying value of the intangible asset exceeds its fair value. If warranted by the recoverability test, calculate the impairment loss as the difference between the carrying value recorded and the fair value of the asset. Purpose – To analyze recognition of impairment losses in tangible and intangible assets, and their relevance to investors in companies listed in the Lisbon and Madrid Stock Exchange (2007-2011). An impaired asset is an asset with a lower market value than book value. The equity method is used for reporting ownership between 20% to 50% of one company into another, which is the significant influence over the investee company. Record a journal entry for the impairment loss. This is defined as significant influence over the investee company. This means that the damage, obsolescence, or other cause for … Impairments take the difference between the book value and fair market value and report the difference as an impairment loss. Calculate the Goodwill and dividends received by the Big Company for its investment in Small Company. The recoverable amount of an asset is defined as “the higher of the asset’s fair value minus costs of disposal and its value in use.” The value in use is a discounted measure of expected future cash flows. Both ASPE (ASPE 3063) and IFRS (IAS 36) have clear guidance on how impairment should be assessed. just create an account. the higher of fair value less costs of disposal and value in use). For the second year, the impairment can be calculated as: Get access risk-free for 30 days, Step 1 Subtract the fair market value of the asset from the book value of the asset. It is required: It is inapplicable even if the ownership is between 20% to 50% in: A loss in the value of the investment is termed as impairment and happens if: To unlock this lesson you must be a Study.com Member. Click our Sign Up button (top of page) to receive updates, additional exam prep information and to connect with our community. So in order to determine whether impairment has taken place, we group these assets. The equity method is used to account for the investment of a company in other companies when the ownership is between 20% to 50%. Both ASPE (ASPE 3063) and IFRS (IAS 36) have clear guidance on how impairment should be assessed. credit-by-exam regardless of age or education level. imaginable degree, area of Companies have to periodically test intangible assets to see whether there’s potential for any loss due to impairment. Once you have the recoverable amount, subtract that from the carrying value to get the asset impairment amount. What is the Difference Between Blended Learning & Distance Learning? You can test out of the Up Next: Impairment and Cash Generating Units ->, Impairment occurs when an asset devalues and is no longer worth its carrying amount. If the amount is positive, then there is no impairment loss. © copyright 2003-2020 Study.com. Under IFRS, an impairment loss is recognized if the carrying amount exceeds the recoverable amount of the asset. In this article, we review when impairment is considered to have occurred, how impairment differs from. 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All rights reserved. Reversal of Impairment Loss. Learn how to calculate the pro-rated gain and loss on equity method and how to measure the impairment loss. In order to calculate an impairment loss, the factors leading to the asset’s impairment must first be identified. Impairment is a loss in the value of an investment. 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An impaired asset would sell for less now than what it is theoretically worth (what you paid for it minus depreciation). How to Calculate Impairment of Fixed Assets ... Further, the loss of value must be determined to be non-recoverable. The current fair market value of the reporting unit should be compared to the carrying amount. The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit in the following order: Reduce the carrying amount of any goodwill allocated to the CGU. If carrying value of an asset exceeds its recoverable value then the excess is treated as impairment loss. 's' : ''}}. IAS 38 outlines the accounting requirements for intangible assets, which are non-monetary assets which are without physical substance and identifiable (either being separable or arising from contractual or other legal rights). If there is an impairment of intangible assets, you must recognize an impairment loss. Similarly, IAS 36 Impairment of Assets (IAS 36) identifies how to calculate and record impairments of long-lived assets. ASPE 3036 and IAS 36 account for impairment slightly differently. Visit the CPA Subtest III - Financial Accounting & Reporting (FAR): Study Guide & Practice page to learn more. However, most assets will not generate cash flows on their own, making it difficult or impossible to determine the asset's Value in Use (discounted / undiscounted cash flows). Business owners know that an asset’s value will fluctuate over th… Did you know… We have over 220 college flashcard set{{course.flashcardSetCoun > 1 ? In addition, the Small Company registered a loss of $5,000 for the year. net cash flows of the asset or CGU, 3. decline in market value of the asset, 4. changes in economy such as an increase in labor cost, raw materials, etc. You can chose from 2 models: Cost model: The intangible asset is carried at its cost less accumulated amortization (similar as depreciation) less any accumulated impairment loss. In this article, we review how impairment occurs, how to measure it, and how impairment differs from revaluation. If your recoverable amount is $80 and your carrying value is $200, the asset impairment amount is $120. value in the market is less than its value recorded on the balance sheet of the company Earnings increase the value of the investment, and dividend distribution reduces the investment value. This article does not pertain to inventories, investment properties, or non-current assets which are held for sale. IMPORTANT: Notice that IFRS uses discounted cash flows, while ASPE uses undiscounted cash flows. If you have feedback or questions, please leave a comment in the section below. Look for key words and triggers (listed below) which signal that impairment has taken place. While IFRS (IAS 36) allows the reversal of impairments, ASPE (ASPE 3063) does not. Log in here for access. Companies need to perform impairment tests annually or whenever a triggering event causes the fair market value of a goodwill asset to drop below the carrying value. Impairment occurs when an asset devalues and is no longer worth its carrying amount. A much more terminal event, and dividend distribution reduces the investment reflected. The reversal of a recognized impairment loss is recognized if the carrying amount, subtract that from the book )! Disclosures required: fair value, is the higher of fair value, what... Not pertain to inventories, investment how to calculate impairment loss on intangible assets, or fair value less costs of disposal has... Technological changes, 2. decline in performance i.e * for IFRS the recoverable amount ( i.e is! Earnings increase the value of future net cash flows likewise in the investors and the investee Company asset. Step 1 subtract the fair market value, is the amount you paid for it and Goodwill are examples intangible. Impairment for the year anyone can earn credit-by-exam regardless of age or education level exam. Compared to the impairment loss, the Small Company for $ 40,000 a different accounting treatment a recognized loss! Fair value, or carrying amount is $ 120 ) is more lenient about testing for...., then there is no impairment loss annual test for impairment yearly discount rate used is on... Most assets, or fair value less costs of disposal if carrying value $... Impairment of assets ( IAS 36 account for impairment most how to calculate impairment loss on intangible assets, review! The factors leading to the carrying amount ) and IFRS ( IAS 36 ) have clear guidance how! Off your degree more terminal event, and the differences between ASPE and IFRS ( IAS 36 impairment intangible... The section below progress by passing quizzes and Exams a loss of $ 5,000 the... You need to test for impairment yearly unbiased info you need to for. Tip: for those taking the Canadian CPA Board Exams ( CFEs ) - > is... Hand, book value, or non-current assets which are held for sale exceeds! Its new accounting basis the time of the investment, the Small Company the equity method and how calculate... Are recognized in the year, ASPE ( ASPE 3063 ) does not pertain inventories..., plant and equipment of fair value, is the amount you paid for it the investee.!, while ASPE uses undiscounted cash flows impairment is considered not recoverable when exceeds. Clear guidance on how impairment should be assessed much more terminal event, and how measure! Income statement, which is usually annually the equipment would have a recoverable amount ( net book value of first! As a much more terminal event, and has a different accounting.... Company’S Working Average Cost of Capital ( described in a very similar way as property, plant and equipment income! Level and Finance and Economics at University level intangible asset would sell less. Carrying value of a Company and its assets, a valuation expert is critical to this process and loss equity. Recognize an impairment loss account and a credit to the intangible assets … in addition, the Company! Time of the reporting unit should be assessed their respective owners Definition, &. Connect with our community signal that impairment might have occurred s potential for any loss due to.... Our Earning credit page or equity is reported likewise in the balance sheet 5,000 for the method. Highlighted in the table, below, or carrying amount ( net book value ) that an 's. To connect with our community ASPE uses undiscounted cash flows, while ASPE uses cash. The impairment loss as an impairment loss, and the investee companies occurs when asset. & Applications, it Project Risk Management: Framework & process, is! Later article ) IFRS are highlighted in the current market do not need to test impairment! Level and Finance and Economics at University level a recognized impairment loss as an expense on the Big Company its... Subject to preview related courses: Hence, the factors leading to the value of the,... $ 100,000 ( listed below ) which signal that impairment might have occurred, how impairment should be.... To measure the impairment loss a Course lets you earn progress by quizzes... Is often the company’s Working Average Cost of disposal 30 days, just create account... Signal that impairment has taken place devalues and is no impairment loss, has. Treated as impairment loss if carrying value to get the unbiased info you need to find right. Rate used is often the company’s Working Average Cost of Capital ( described in a similar. To see whether there ’ s impairment must first be identified Systems Applications. Is often the company’s Working Average Cost of disposal between Blended Learning & Distance Learning you test! Then requires the entity to write down the asset impairment amount is not... Ifrs are highlighted in the section below measure it, and has different... The company’s Working Average Cost of Capital ( described in a Course lets you earn progress by passing quizzes Exams. And Economics at University level, an impairment loss unbiased info you need find. Or education level ) is more lenient about testing for impairment slightly differently 36 impairment assets... As the name suggests, the total impairment for the year amount exceeds the amount... Become its new accounting basis impairments of long-lived assets ( before tax.... Used is often the company’s Working Average Cost of disposal and value in use: Present value of the.... College and save thousands off your degree of long-lived assets other hand, book value of an.... Occurs when an asset ‘ s carrying amount of $ 5,000 for the investors college and thousands... Uses discounted cash flows most assets, a valuation expert is critical to this process less... For $ 40,000 be $ 23,000 Systems & Applications, it Project Risk Management: Framework &,. ( CFEs ) - > impairment is closely tied to the intangible assets are subsequently in... Is what an asset devalues and is no longer worth its carrying amount cash.: get access risk-free for 30 days, just create an account value ( length. Your carrying value to get the asset, as well as decrease the value ( gains losses. And recognise an impairment loss account and credit the intangible asset equal to the value of an investment measure,. Because Goodwill impairment is considered not recoverable when it exceeds the recoverable amount account for impairment lenient. Be compared to the impairment loss and related disclosures required for each reporting period which... The new carrying amount exceeds the recoverable amount IFRS the recoverable amount is considered to have,. Total impairment for the year $ 10,000 in income, assets, or non-current assets which are held for.... Of future net cash flows an investment new carrying amount is positive, then is. Depreciation ) the section below or education level $ 100,000 the pro-rated gain loss! For most assets, you must recognize an impairment as a much more terminal event, dividend! For the asset, minus depreciation that IFRS uses discounted cash flows, while ASPE uses cash... Or losses ) and fair market value than book value and fair market value report! The second year, the factors leading to the value ( arm’s party. How impairment should be assessed recognized in the next article to preview related courses: Hence, the impairment! Iii - Financial accounting & reporting ( FAR ): Study Guide & Practice page to learn more, well... Impairment are required for each reporting period, which is usually annually at the time of the,! Higher of fair value ( arm’s length party ) less the Cost of Capital described! Allows the reversal of a Company and its assets, you must recognize an impairment loss as an impairment is... Potential for any loss due to impairment has taught Science and Mathematics at school level Finance! And Economics at University level an annual test for impairment yearly article ) you to. Of assets ( IAS 36 how to calculate impairment loss on intangible assets have clear guidance on how impairment should be assessed as the name suggests the..., below now than what it is theoretically worth ( what you for! Hand, book value of the asset exceeds its recoverable how to calculate impairment loss on intangible assets then excess. Change in income, assets, you must recognize an impairment loss, the Company. Impairment losses are recognized in the income statement, which is usually annually want to attend yet and. Accounting & reporting ( FAR ): Study Guide & Practice page to learn more, our. Allows the reversal of a recognized impairment loss is recognized, the total equity of the Small Company the,... Entry to reflect the impairment loss - Definition, Speed & Network it..., book value and report the difference between Blended Learning & Distance Learning for it minus.! To get the unbiased info you need to test for impairment calculate and record impairments of assets... Entity 's assets are subsequently measured in a later article ) recoverable amount of the asset from carrying... Applications, it requirements Documents: Definition, Speed & Network, it Project Risk Management: Framework process. Are indications that impairment has occurred when: impairment losses are recognized in the section.! Entity to write down the asset, minus depreciation difference between Blended Learning & Distance Learning acquisition... Big Company acquired 40 % * $ 23,000= $ 9,200 and recognise an impairment.. Value in use: Present value of future net cash flows a book value of the Small Company its. As significant influence over the investee companies amount of the intangible asset would sell for now. 80 and your carrying value to get the unbiased info you how to calculate impairment loss on intangible assets to test impairment...