Debitoor Dictionary

Accounting terms explained in a simple way

Impairment - What is impairment?

An impairment is a reduction in the recoverable amount of a fixed asset or goodwill below its book value

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

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.

Impairment means 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.

How impairment is determined

Although often applied differently, impairment occurs when the value of a fixed asset drops dramatically lower than it’s market or book value. This can cause ramifications in the balance sheet based on the value that has been recorded for the asset.

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

Fixed assets that are susceptible to impairment should be checked regularly by an accountant who can then handle the write-off for the loss amount in the business accounts.

Impairment vs. amortisation

While impairment might seem highly similar to amortisation, as it also applies to the value of assets, impairment relates more to a sudden and irreversible decrease in value, which can occur for example if a piece of machinery breaks and is irreparable.

Amortisation is the more gradual, common decrease in the value of an intangible asset. Amortisation is tracked and accounted for over time based on the useful life of the asset and the expected resale value.

Impairment in accounting

Impairment losses are recorded on the balance sheet and in the profit-and-loss account of the business. If a write-off is necessary for the loss incurred for the impairment, this should also be recorded in the business records.