How do you deal with impairment issues in real estate investments?

1 What is impairment and why does it matter?

Impairment is a form of asset write-down that reduces the carrying value of an asset to its recoverable amount. Recoverable amount is the higher of the asset's fair value less costs of disposal or its value in use. Fair value is the price that would be received to sell the asset in an orderly transaction between market participants. Value in use is the present value of the future cash flows expected to be derived from the asset. Impairment matters because it reflects the loss of economic benefits from an asset and affects the financial performance and position of the entity that owns it.

2 How to identify impairment indicators?

At each reporting date, the International Accounting Standards Board (IASB) requires entities to assess whether there are any indications that an asset may be impaired. Indicators of impairment for real estate investments can include a significant decline in the market value of the asset or similar assets, adverse changes in the legal, regulatory, or economic environment, obsolescence or physical damage of the asset, poor operational performance or cash flow generation, higher costs or lower revenues than expected, and internal or external plans to dispose of the asset or restructure its operations.

3 How to measure impairment loss?

If there is any indication of impairment, the entity should estimate the recoverable amount of the asset and compare it with its carrying value. If the recoverable amount is lower than the carrying value, the entity should recognize an impairment loss for the difference and reduce the carrying value of the asset accordingly. The impairment loss should be allocated to the asset or its cash-generating unit and recognized in the income statement as an expense. The entity should also disclose the amount and nature of the impairment loss and the methods and assumptions used to estimate the recoverable amount.

4 How to report impairment loss?

The entity should report the impairment loss in the financial statements and provide relevant information to the users. The entity should present the impairment loss as a separate line item in the income statement or disclose it in the notes. The entity should also show the carrying value of the asset after the impairment loss in the balance sheet or disclose it in the notes. The entity should also explain the reasons for the impairment loss, the events and circumstances that led to it, and the impact on the entity's financial position and performance.

5 How to avoid or mitigate impairment issues?

Impairment issues can be avoided or mitigated by following certain best practices, such as monitoring the market conditions and the performance of the asset or its cash-generating unit regularly and proactively. It is also important to review the useful life and the depreciation method of the asset periodically and adjust them if necessary. Additionally, impairment tests should be conducted annually or more frequently if there are impairment indicators. Furthermore, consistent and reliable methods and assumptions should be applied to estimate the recoverable amount and the impairment loss. Lastly, the impairment issues should be communicated clearly and transparently to the stakeholders and the regulators.