What is Impairment?
Recognizing that an asset is worth less than the books say - and writing it down to the truth.
Impairment: definition
Assets can lose value faster than depreciation assumes - a factory line becomes obsolete, an acquisition underperforms, a brand fades. Impairment testing compares an asset carrying amount to its recoverable amount (fair value or value in use). If carrying value is higher, the difference is booked as an impairment loss, permanently reducing the asset. Under US GAAP most impairments are not reversed later.
Impairment loss
Impairment Loss = Carrying Amount − Recoverable Amount
Recoverable amount is the higher of fair value less costs to sell and value in use (discounted future cash flows from the asset).
How Fintra handles it
Fintra watches for impairment indicators - assets tied to discontinued lines, goodwill from underperforming acquisitions, long-idle equipment - and surfaces them for review rather than letting overstated values sit on the balance sheet. The write-down entry is drafted with its supporting rationale, and a named human approves it before it posts.
- Impairment indicators flagged from usage, segment, and cash-flow signals
- Write-down entry drafted with recoverable-amount rationale attached
- A named human approves any impairment before it hits the books
Worked example
Frequently asked questions
What is the difference between impairment and depreciation?
Depreciation spreads an asset cost systematically over its useful life on a planned schedule. Impairment is an unplanned, one-time write-down when the asset value drops below its carrying amount faster than depreciation reflects. Both reduce the asset and hit profit, but for different reasons.
Can an impairment be reversed?
Under IFRS, impairments on most assets (except goodwill) can be reversed if value recovers. Under US GAAP, impairment losses are generally not reversed. So the accounting standard you follow determines whether a later recovery can be booked.
How often should assets be tested for impairment?
Goodwill and indefinite-lived intangibles are tested at least annually, and any asset is tested whenever indicators suggest its value has fallen - such as damage, obsolescence, market decline, or restructuring. Fintra flags those indicators as they arise.
How does impairment affect the financial statements?
The write-down reduces the asset on the balance sheet and records an impairment loss on the income statement, lowering net income for the period. It is a non-cash charge, so cash flow is unaffected, though it can breach loan covenants tied to asset values or earnings.
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