Inventory impairment is a process that is used to adjust the worth of an inventory based on the current market value of the individual goods currently held in that inventory. Typically, the process is used in the process of declaring certain items obsolete and being able to mark them off the inventory for disposal. From this perspective, inventory impairment is very important, since companies do pay taxes on the current book value of the total worth of the inventory.
One way to understand how inventory impairment works is to consider a manufacturing company that carries an expensive machine component that was once essential to the production process. In recent years, that machinery was replaced by something newer and more efficient, but the components related to the older machines were kept in the supplies inventory, with no more than the usual annual depreciation. By using inventory impairment, it is possible to ascertain the current market value for those parts and adjust the book value to reflect that market value. If there is no longer a market for those parts at all, the company may be able to move past the impairment process and declare the parts obsolete and worthless, legally removing them from the inventory altogether.
Using inventory impairment is very helpful to maintaining an accurate assessed value for an inventory. Since most governments have tax regulations that require taxation on any type of company inventory, making sure that the book value of those inventories is justifiable in terms of the current market value is very important. Without engaging in inventory impairment to determine when and if there is a need to adjust the book value, there is a good chance the company will pay out more in taxes that is necessary. This in turn means that the company has less net profit to divert back into the business itself.
Companies normally engage in inventory impairment each time that physical counts of the existing inventory are made. During the course of the inventory, notes are made about high-priced items that have not seen any actual usage in some time. From there, the task will involve determining if the items are still useful to the company, and what difference may exist between what the items would bring if sold in the open market and the current unit value carried in the accounting records. Using this process, a company can make adjustments to the book value, sometimes known as an impairment loss, so the value of the inventory is more in line with the market value for those same items.
