Impairment Accounting
should a company be allowed to account for asset appreciation and asset impairment?
Generally speaking, a company is required to account for impaired assets but prohibited from accounting for asset appreciation.
The reasoning is fairly simple: an asset that is impaired needs to be accounted for to avoid misleading investors. Imagine if a car dealership reported all the cars on its lot as assets after they were made worthless by a flood! Typically, impairment is fairly easy to identify.
Appreciation is not taken into account because of difficulties in measurement and also the potential for investors to be misled. If every company had to revalue all of their assets after each accounting period, they would spend all their money on accountants and appraisers. Plus, this would be quite open to manipulation, as the job of an appraiser has a large amount of subjectivity. It is much less expensive and subjective to account for asset appreciation at the time the asset is disposed (as a gain or loss).
Fairvalue #567 Fair Value Accounting Standards
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