Impairment definition

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What is Impairment in Accounting?

Impairment is a permanent decline in the value of an asset. This situation exists when the cash flows or other benefits generated by an asset decline, as determined through a periodic assessment process. Depending on the situation, an impairment can cause a major decline in the book value of a business.

Examples of Impairment

There are numerous examples of impairment, including the following items:

  • When a tornado blows the roof off a factory, with rain ruining the machinery installed there.

  • When the government forces the closure of a nuclear power plant, thereby eliminating any cash flows that might otherwise have been earned from it.

  • When competing products reduce the output of a production line, resulting in greatly scaled-back production runs.

  • When fashion items held in inventory are no longer selling, because styles have moved on to different concepts.

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Accounting for an Impairment

If there is impairment, then the difference between the fair value of the asset and its carrying amount is written off. This write-off occurs at once; the charge is not spread over multiple accounting periods.