Impairment is the recognition that an asset is worth less than its carrying value - the amount it is recorded at on the balance sheet. When the recoverable amount (what the asset could fetch or earn) drops below the carrying value, the difference is written off as an impairment loss.
What it means
Impairment is separate from depreciation. Depreciation is the planned, systematic write-down of a fixed asset over its life; impairment is an unplanned, additional write-down triggered by a loss in value - damage, obsolescence or a market downturn. A business tests for impairment when there is an indicator that an asset may have lost value.
Where it fits in
Impairment sits firmly in asset accounting and does not flow through payroll. It is included here as the third way an asset's carrying value changes - cost, then depreciation, then impairment - completing the picture for anyone tracing how fixed assets move on the balance sheet.
Key rules
- Recognised when recoverable amount falls below carrying value.
- An unplanned write-down, distinct from routine depreciation.
- The loss is an expense on the income statement.
- Tested for when there is an indicator of lost value.
