Impairment definition
/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.
Related AccountingTools Courses
Goodwill Impairment Essentials
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.
Sample Disclosure of an Asset Impairment
Asset impairments may be disclosed in the footnotes accompanying the financial statements issued by an organization. Here is a sample disclosure:
Note X: Impairment of Assets
During the fiscal year ended [Year-End Date], [Company Name] conducted an impairment review in accordance with [applicable accounting standard, e.g., IFRS IAS 36 or US GAAP ASC 360]. As a result of this review, the company identified indicators of impairment related to its [specific asset or asset category, e.g., manufacturing equipment, goodwill, or real estate assets], primarily due to [reason for impairment, such as declining market demand, obsolescence, or a significant decrease in asset value].
A recoverability assessment was performed, comparing the carrying amount of the asset to its estimated recoverable amount, which is the higher of its fair value less costs to sell and its value in use. Based on this assessment, an impairment loss of $X,XXX,XXX was recognized in the [Income Statement section, e.g., Other Expenses or Impairment Loss]. This impairment reduced the carrying amount of the affected asset(s) from $X,XXX,XXX to $X,XXX,XXX as of [Balance Sheet Date].
Management will continue to monitor the asset’s performance and market conditions to assess whether further adjustments are necessary.