What is Impairment?

Definition: Impairment is a reduction in the recoverable amount of a fixed asset (or goodwill) below its carrying amount.

Accounts commonly recognize and record the values of all of a company's assets. The value of these assets are usually determined by the current market.

But often, the value of an asset changes as time passes. Impairment relflects the reduction in the quality, durability, quantity, or market value of an asset.

Conversely, appreciation is when the value of an asset increases.

A reduction of value

The value of fixed assets (e.g. buildings, machinery, land) can be prone to impairment. Numerous factors could lead to their reduction in value.

For example, wear and tear, poor management, new competition, technological innovations, etc. could all result in an asset becoming less valuable.

Regular use can often result in the reduced value of an asset. For instance, this is often the case with assets such as machinery. However, an asset can also simply depreciate in value over time. This depreciation is usually distributed throughout the asset's lifetime.

Remember: The definition of impairment is usually subjective. It can be problematic to determine the fair value of an asset, and therefore various conclusions about this value can be found.

The Profit and loss account

In order to measure the impairment value of an asset, a comparison of the value of the asset with its recoverable amount (the highest value that can be retrieved by selling the fixed asset) must be made.