Debitoor Dictionary

Accounting terms explained in a simple way

Over 150 Articles for Founders and Entrepreneurs

  1. Amortisation
  2. Assets
  3. Depreciation
  4. Goodwill
  5. Profit & Loss Statement
  6. Revaluation

Impairment - What is impairment?

Definition: A reduction in the recoverable amount of a fixed asset or goodwill below its carrying amount.

Most accounts recognize and document the values of all assets: fixed assets, current assets, etc. These values are set by the current market.

However the value of most assets changes over time. In accounting, impairment is the diminishing in quality, strength, amount, or value of an asset. An increase in the value of an asset is called appreciation.

A decrease in value

The value of fixed assets such as buildings, land, machinery, and equipment can be susceptible to impairment. The decline in their value could be due to any number of factors, such as wear and tear, poor management, new competition, technological innovations, etc.

An asset can become less valuable because of use, as is often the case with assets like machinery for instance, or an asset simply depreciates in value over time. This depreciation is commonly distributed over the asset's entire lifetime.

Note:The definition of impairment is often subjective. Determining the fair value of an asset can be problematic, and different experts can arrive at different conclusions.

Profit and loss

Impairment losses are accounted for in the profit-and-loss account.

To measure the impairment value of an asset, you must compare the value of the asset with its recoverable amount (the highest value that can be obtained from selling the fixed asset or income-generating unit).