Final answer:
After recording an impairment loss, the new cost basis of an asset is its adjusted carrying amount, which is the carrying amount minus the impairment loss. This adjusted basis will be used for future depreciation or amortization and cannot be reversed if the asset's value increases.
Step-by-step explanation:
When an asset on a company's balance sheet suffers an impairment loss, its cost basis must be adjusted to reflect this change. An impairment occurs when the carrying value on the books exceeds the recoverable amount, which is the higher of the asset's fair value less costs to sell and its value in use. It is essential to accurately record these losses to provide a true representation of a company's financial status.
After recognizing an impairment loss, the new cost basis of the asset will be its adjusted carrying amount. This is the current carrying amount minus the impairment loss. For example, if an asset originally cost $10,000 and it has depreciated by $2,000, the carrying amount would be $8,000. If an impairment review reveals that the recoverable amount is $5,000, the impairment loss would be $3,000 ($8,000 carrying amount - $5,000 recoverable amount), and the new cost basis of the asset would be $5,000.
The new cost basis will be the figure used for subsequent accounting periods for depreciation or amortization calculations, as well as for determining any future impairment losses or gains on disposal. As per accounting standards, once an impairment loss has been recognized, it cannot be reversed if the fair value of the asset subsequently increases. This underscores the importance of a meticulous impairment review process.