Impairment
An impairment (bijzondere waardevermindering) is a write-down when the carrying amount of an asset can no longer be recovered under the applicable rules.
What does impairment mean?
An impairment (bijzondere waardevermindering) is a write-down when the carrying amount of an asset can no longer be recovered under the applicable rules.
It comes on top of regular depreciation. Assess signals such as loss-making activities, damage or a sharply reduced market value; any reversal follows its own rules.
How does it work?
Art. 2:387(3) DCC requires that, in valuing fixed assets, account is taken of an impairment that is expected to be lasting. RJ 121 elaborates on this. On each balance sheet date you assess whether there are indications: damage, obsolescence, a discontinued activity, disappointing results, a sharply fallen market price or a risen market interest rate. If there is an indication, you determine the recoverable amount: the higher of the net realisable value (selling price less selling costs) and the value in use (the present value of the cash flows the asset will still generate). If it is below the carrying amount, you write off the difference.
The write-down is charged to the profit and loss account, except to the extent that the asset was previously revalued upwards through the revaluation reserve (art. 2:387(4) DCC). It is reversed as soon as the impairment has ceased to exist; for goodwill, reversal is excluded (paragraph 5).
Example
A printing company (BV) has a press with a carrying amount of € 120.000 and a remaining useful life of four years. A major customer cancels; the press is running at half capacity. A dealer offers € 70.000 and the selling costs are € 4.000: net realisable value € 66.000. The expected net cash flows are € 24.000 a year for four years; discounted at 8% that is a value in use of € 79.500 (rounded). Recoverable amount: the higher of the two, € 79.500. Write-down: 120.000 − 79.500 = € 40.500. Journal entry: impairment € 40.500 debit, machinery € 40.500 credit.
In the annual accounts
Lower asset value on the balance sheet and an expense in the P&L.
Difference from a provision
An impairment lowers the carrying amount of an asset the company already has. A provision is an obligation on the liabilities side whose size or timing is uncertain. The law keeps them apart: an impairment of an asset is not expressed by creating a provision (art. 2:374(2) DCC). The item commonly called a provision for doubtful debtors is therefore a deduction from the receivable.
Common mistakes
- Calling normal depreciation an impairment
- Ignoring loss of value without support
What should you watch for?
- Record at each balance sheet date that you have gone through the indications, even if there are none.
- Support the value in use with the budget the board also uses for other decisions, and with a pre-tax discount rate (RJ 121).
- Write-downs and reversals on fixed assets are shown separately in the profit and loss account or the notes (art. 2:387(4) DCC), also for a small legal entity. A micro entity combines them with depreciation into one item (art. 2:395a(5) DCC).
Legal basis and source
art. 2:387 DCC; RJ 121
Frequently asked questions
When do you test for an impairment?
On each balance sheet date you assess whether there are indications. Only if there are do you calculate the recoverable amount. For intangible fixed assets not yet in use or amortised over more than twenty years, the calculation is required every year (RJk B1.111 for micro and small).
Can a write-down be reversed later?
Yes. The law requires reversal as soon as the impairment has ceased to exist (art. 2:387(4) DCC). Only a write-down of goodwill remains final (paragraph 5).
Read more
Preparing Dutch annual accounts?
Your first set of annual accounts is free, for every size class. Create an account and prepare the annual accounts of your Dutch company under Title 9 of Book 2 of the Dutch Civil Code.
Get started