What is the theoretical basis for the setting of the asset impairment provision account?

Impairment provision means that the carrying amount of an asset exceeds its recoverable amount, and the judgment of whether the asset is impaired should be based on certain indications that the asset may have been impaired, and if any of these indications exist, the enterprise should make a formal estimate of its recoverable amount. The fixed assets of an enterprise can be measured according to the lower of the book value of the fixed assets and the recoverable amount, and the impairment provision can be made according to the difference between the recoverable amount and the book value. The recoverable amount must be judged based on the internal or external independent appraisal report provided by professionals from relevant technical, management and other departments.

In 2006, the Ministry of Finance issued a new Accounting Standard No. 8 --- Asset Impairment, which includes individual assets and asset groups. If the main cash inflow generated by an asset is difficult to be independent of other assets or asset groups, the allowable amount should not be determined on the basis of the single asset, but on the basis of the asset group to which the asset belongs, and then the impairment loss of the asset should be determined accordingly. An extension of the concept of asset groups is the combination of asset groups, the most typical and common example of which is headquarters assets.

The assets of the enterprise headquarters include the office buildings and electronic data processing equipment of the enterprise group or its business divisions. The distinctive feature of these assets is that it is difficult to generate independent cash inflows from other assets or asset groups, and it is difficult for their book value to be fully attributed to an asset group. If there is an indication that a headquarters asset may be impaired, the company should calculate the recoverable amount of the asset group or combination of asset groups to which the headquarters asset belongs, and then compare it with the corresponding carrying amount to determine whether an impairment loss needs to be recognized.

Why is it necessary to recognise the loss of assets that did not occur but was only likely to occur? Because there are various risks and uncertainties in the business activities of enterprises, the system requires that enterprises should follow the principle of prudence when conducting accounting, that is, when enterprises make professional judgments in the face of uncertain factors, they should maintain necessary caution, fully estimate various risks and losses, not overestimate assets or income, and not count liabilities or expenses.

Ensure the authenticity of the asset and meet the requirements of the definition of asset (asset refers to a resource that has been formed by past transactions or events and is owned or controlled by the enterprise, and that the resource is expected to bring economic benefits to the enterprise). China's current provisions on asset impairment provisions not only illustrate the importance of the principle of prudence, but also to avoid the inflated profits of enterprises caused by the inflated assets, and at the same time ensure the authenticity and comparability of the financial information of enterprises. It should be noted that the application of the prudential principle does not mean that the enterprise can set up a secret provision, otherwise it is an abuse of the prudential principle and will be treated as a material accounting error.

If you remember the definition of an asset in accounting, then you can find that one of the necessary conditions for an asset is that it can bring future cash or economic benefits to the business. So take inventory as an example:

The new accounting standard stipulates that when the carrying amount of inventory is lower than its net realizable value, a provision should be made for inventory depreciation, which is the inflow of future cash or economic benefits. If the inflow of cash or economic benefits decreases in the future, the value of the asset decreases. Therefore, a provision should be made for inventory decline.

Further, take fixed assets as an example: the new accounting standards stipulate that when the carrying amount of a fixed asset is lower than its recoverable amount, a provision for impairment of fixed assets should be made. Please note that the recoverable amount of fixed assets and the net realizable value of inventory are not the same concept, and it can be said that the recoverable amount is broader.

Due to the reproducibility of fixed assets, when the value of a fixed asset in the market is less than its book value, it is not necessary to make an impairment provision, because this fixed asset can also bring economic value to the enterprise by manufacturing products in reproduction. Only when the products produced by fixed assets cannot achieve the expected benefits, and the market value is lower than the book value, will the impairment provision of fixed assets be made.

Therefore, it may be helpful to understand asset impairment provision in terms of the definition of an asset.

If the recoverable amount of an asset is lower than its book value, the impairment provision shall be made for the difference between the recoverable amount and the book value, and shall be included in the profit or loss for the current period.

1. This account accounts for the losses caused by the provision for impairment of various assets in accordance with the criteria of asset impairment.

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2. This account shall be accounted for in detail according to the items of asset impairment losses.

3. If an enterprise determines the impairment of assets according to the criteria of asset impairment, this account shall be debited according to the amount to be written down, and the provision for bad debts, inventory depreciation, long-term equity investment, held-to-maturity investment, fixed assets, construction in progress - impairment provision, engineering materials - impairment provision, productive biological assets - impairment provision, goodwill - impairment provision, loan loss provision, debt assets - impairment provision, surplus materials - impairment provision and other accounts.

4. If the value of the relevant assets is restored after the provision for bad debts, inventory depreciation, impairment of held-to-maturity investments, loan losses, etc., within the amount of impairment provisions that have been originally accrued, the accounts of bad debts, inventory depreciation, held-to-maturity investment impairment provisions, loan loss provisions, debt-bonded assets - depreciation provisions, and surplus materials - depreciation provisions shall be credited to this account according to the amount of the recovery increase. 5. At the end of the period, the balance of this account should be transferred to the "profit of the year" account, and there is no balance in this account after the carryover.

Provision for impairment of assets is a profit and loss account. If the impairment of assets is determined according to the criteria of asset impairment, this account shall be debited according to the amount to be written down, and the provision for bad debts, provision for inventory decline, provision for impairment of long-term equity investment, provision for impairment of held-to-maturity investment, provision for impairment of fixed assets, provision for impairment of construction in progress, provision for impairment of engineering materials, and provision for impairment of productive biological assets shall be credited.

The meaning of asset impairmentAsset impairment is when the recoverable amount of an asset is less than its book value. The assets here, unless otherwise specified, include individual assets and asset groups. The term "asset group" refers to the smallest asset portfolio that an enterprise can identify, and the cash inflow generated by it should be basically independent of the cash inflow generated by other assets or asset groups.

1. Provision for short-term investment price decline.

2. Provision for bad debts.

3. Provision for inventory decline.

4. Provision for impairment of long-term investment.

5. Provision for impairment of fixed assets.

6. Provision for impairment of intangible assets.

7. Provision for impairment of construction in progress.

8. Provision for impairment of entrusted loans.

Borrow: Asset impairment loss.

Credit: provision for bad debts.

Provision for short-term investment declines.

Provision for decline in inventory value.

Provision for impairment of long-term investments.

Provision for impairment of fixed assets.

Provision for impairment of intangible assets.

Provision for impairment of construction in progress.

Provision for impairment of entrusted loans.

Provision for impairment of investment real estate.

Provision for impairment of long-term equity investments.

The so-called asset impairment provision refers to the fact that if the recoverable amount of the fixed asset is lower than the book value due to the continuous market price of the fixed asset, or the obsolescence, damage, long-term idleness, etc., the difference between the recoverable amount and the book value shall be taken as the impairment provision amount.

Article 56 of the Accounting System for Business Enterprises stipulates that: "An enterprise shall inspect the fixed assets item by item at the end of the period, and if the recoverable amount is lower than the book value due to the continuous market price, or the obsolescence of technology, damage, long-term idleness, etc., the provision for impairment of fixed assets shall be made."

What profit and loss account does asset impairment provision belong to?

Asset impairment losses are profit and loss accounts. Provision for impairment of fixed assets Provision for impairment of intangible assets Provision for decline in value of inventories is an allowance for assets. The accounting treatment at the time of impairment is, debit:

Asset impairment loss, Credit: Provision for impairment of fixed assets Provision for impairment of intangible assets Provision for decline in value of inventory.

The impairment of an asset is referred to as asset impairment when the recoverable amount is less than its book value due to damage, obsolescence or other economic reasons.

If the recoverable amount of an asset is lower than its carrying amount, an impairment provision shall be made for the difference between the recoverable amount and its carrying amount and included in the profit or loss for the current period.