What Is Asset Deficiency?
Asset deficiency is asituation where a company's liabilities exceed its assets. Asset deficiency is a sign of financial distress and indicates that a company may default on its obligations to creditors and may be headed for bankruptcy.
Asset deficiency can also cause a publicly traded company to be delisted from a stock exchange. A company may be involuntarily delistedforfailing to meet minimum financial standards. When a company no longer meets listing requirements, the listing exchange will issuea warning of noncompliance. If the company fails to address and correct the issues outlined in the warning, the company's stock may be delisted.
Key Takeaways
- If a company's liabilities exceed its assets, this is a sign of asset deficiency and an indicator the company may default on its obligations and be headed for bankruptcy.
- Companies experiencing asset deficiency usually exhibit warning signs that show up in their financial statements.
- Red flags that a company's financial health might be in jeopardy include negative cash flows, declining sales, and a high debt load.
- By filing for Chapter 11 bankruptcy, a failing company is allowed to reorganize and restructure as it attempts to regain profitability.
- In a worst-case scenario, asset deficiency may force a company to file for Chapter 7 bankruptcy, which means the company will go out of business entirely, liquidating as a means to pay off its creditors and bondholders.
Understanding Asset Deficiency
While a company may experience a temporary or short-term asset deficiency, there are usually warning signs that indicate the financial distress is much more serious and could lead to the company's failure. Reviewing a company's financial statements over a few years can help investors get a clearer picture of the company's current health and future prospects.
Key points to look for would be negative cash flows in the cash flow statement. Negative cash flow could be a sign that managers are not efficient at using the company's assets to generate revenue. Poor sales growth and declining sales over a period of time could indicate insufficient demand for a company's products or services.
Investors should also review a company's debt load, which can be found on the balance sheet and represents the amount of debt the company is carrying on its books. High fixed costs combined with a high debt load and income insufficient to pay liabilities are all red flags that a company's financial health is in jeopardy.
A simple way for investors to research a publicly traded company's financial statements is to go to the company's investor relations (IR) page on its website to access the company's quarterly and annual reports.
Asset Deficiency and Bankruptcy
A company that has a chance at recovering financially may file for Chapter 11 bankruptcy, under which the company is restructured, continues to operate, and attempts to regain profitability. As part of a Chapter 11 reorganization plan, a companymay choose to downsizeits business operations to reduce expenses, as well as renegotiate itsdebts.
In a worst-case scenario, asset deficiency may force a company to liquidate as a means to pay off its creditors and bondholders. The company wouldfile for Chapter 7 bankruptcy and go completely out of business. In this situation, shareholders are the last to be repaid, and they may not receive any money at all.
If a company succeeds with its restructuringin Chapter 11, it will typicallycontinue operating in an efficient manner under its new debt structure. If it is not successful, then the companywill likelyfile for Chapter 7 andliquidate.
Example of Asset Deficiency
Following the financial crisis of 2007-2008, many U.S. companies struggled to stay afloat, finding themselves with limited assets and growing liabilities. While many succumbed to asset deficiency and folded, others opted for Chapter 11 restructuring and some eventually reemerged from bankruptcy as profitable businesses.
Two of Detroit's Big Three automakers—Chrysler and General Motors—filed for Chapter 11 protection in 2009. Despite closing thousands of dealerships and laying off tens of thousands of employees, neither company could survive the dramatic decline in new car sales brought about by the Great Recession. The U.S. Treasury ended up bailing out both car companies through loans from the Troubled Asset Relief Program (TARP).
By 2012, however, the fortunes of Chrysler and General Motors had turned around significantly. Both companies repaid their bailout loans and enjoyed a rebound back into profitability.
FAQs
If a company's liabilities exceed its assets, this is a sign of asset deficiency and an indicator the company may default on its obligations and be headed for bankruptcy. Companies experiencing asset deficiency usually exhibit warning signs that show up in their financial statements.
What is impairment of assets with example? ›
Understanding Impairment
For example, a construction company may face extensive damage to its outdoor machinery and equipment due to a natural disaster. This will appear on its books as a sudden and large decline in the fair value of these assets to below their carrying value.
What is an example of assets and explanation? ›
What Are Examples of Assets? Personal assets can include a home, land, financial securities, jewelry, artwork, gold and silver, or your checking account. Business assets can include such things as motor vehicles, buildings, machinery, equipment, cash, and accounts receivable.
What is an example of an asset that can be used? ›
Business: Business assets deliver value to a company because they can be used to produce goods, fund operations and drive growth. Assets include physical items such as machinery, property, raw materials and inventory, and intangible items like patents, royalties and other intellectual property.
What does lack of assets mean? ›
Asset poverty is an economic and social condition that is more persistent and prevalent than income poverty. It is a household's inability to access wealth resources that are sufficient to provide for basic needs for a period of three months.
What are 5 examples of impairment? ›
Examples of impairments include blindness, deafness, loss of sight in an eye, paralysis of a limb, amputation of a limb; mental retardation, partial sight, loss of speech, mutism.
What are three examples of impairment? ›
According to the World Health Organization, disability has three dimensions: Impairment in a person's body structure or function, or mental functioning; examples of impairments include loss of a limb, loss of vision or memory loss. Activity limitation, such as difficulty seeing, hearing, walking, or problem solving.
Is your home an asset? ›
Given the financial definitions of asset and liability, a home still falls into the asset category. Therefore, it's always important to think of your home and your mortgage as two separate entities (an asset and a liability, respectively).
What is asset in real life? ›
What Is a Real Asset? Real assets are physical assets that have an intrinsic worth due to their substance and properties. Real assets include precious metals, commodities, real estate, land, equipment, and natural resources.
How do I make a list of personal assets? ›
Common things to include in an asset list include:
- Physical assets – including property, vehicles, collectible items of value etc.
- Financial assets – including bank accounts, credit cards, investments, pensions etc.
- Insurance assets – including life, home, health, mortgage etc.
Consider these 17 assets that can make you rich (with some patience and maintenance) to choose the best investments for your portfolio.
- Investment properties. ...
- Real estate trusts. ...
- Retirement investments. ...
- Bonds. ...
- Stocks. ...
- Farmland. ...
- Small business investments. ...
- Money market funds.
Examples of assets are principal residence, vehicles, deposits, stocks, bonds, retirement assets (i. e., registered retirement savings plans, registered pension plans, and mutual funds), and registered education savings plans. Debts include mortgages, bank loans, student loans, credit cards, and lines of credit.
What is an example of a family asset? ›
Property acquired by one or both parties to a marriage to be used for the benefit of the family as a whole. Typical examples are the matrimonial home, furniture, and car.
What do assets do to your money? ›
An asset is anything you own that adds financial value, as opposed to a liability, which is money you owe. Examples of personal assets include: Your home. Other property, such as a rental house or commercial property.
Are assets just money? ›
Personal assets are things of present or future value owned by an individual or household. Common examples of personal assets include: Cash and cash equivalents, certificates of deposit, checking, savings, and money market accounts, physical cash, and Treasury bills.
Can an asset have no value? ›
Fully depreciated assets have no book value, so they will not continue to depreciate. That's not to say they have no real value. They may continue to be used by the business indefinitely and might even still have a resell value in many cases.
Is asset impairment good or bad? ›
Recording an impaired asset can have a negative impact on the balance sheet and its related financial ratios due to the reduced value of an asset. It is important to review all impairments because they can signal misuse of assets, decrease in demand, damage to assets, and legal challenges.
How do you treat impairment of assets? ›
An impairment loss is an asset's book value minus its market value. You must record the new amount in your books by writing off the difference. Write the asset's new value on your future financial statements. And, you may also need to record a new amount for the asset's depreciation.
How do you deal with impairment of assets? ›
Dealing with an Impaired Asset
Current market value of the impaired asset should be recorded down in the business balance sheets. The impaired value is seen as a loss in the finances of the business, especially as part of the income statement.
