What is impairment?
An asset is impaired when it is worth less than the amount it's carried at in the books. Assets can't be shown at more than they can recover, either through use or sale, so the excess must be written off.
How impairment is tested
Under IAS 36 Impairment of Assets:
Recoverable amount = higher of (Fair value less costs to sell, Value in use)
Value in use is the present value of future cash flows the asset is expected to generate.
Impairment loss = Carrying amount − Recoverable amount
[Goodwill](/glossary/goodwill) and intangible assets with indefinite lives must be tested every year. Other assets are tested when there are signs of impairment.
Signs of impairment
- Physical damage or obsolescence
- Significant drop in market value
- Adverse changes in technology, markets or law
- The asset is idle or due for early disposal
- Worse-than-expected performance
Example
A machine has a carrying amount of $100,000. Because demand for its product has collapsed, its value in use is $55,000 and it could be sold for $60,000 less $2,000 selling costs. The recoverable amount is $58,000, so the impairment loss is $42,000.
Reversals
Under IFRS, impairment of most assets (but not goodwill) can be reversed if conditions improve. US GAAP generally prohibits reversals for assets held for use.