1. Financial reporting.
A reduction in the recoverable amount of an asset below its carrying amount.
For example, physical damage would be a common reason for recognising an impairment.
Types of assets - Impairment may apply, among other assets, to tangible fixed assets, goodwill, loans or inventory.
An example of an intangible impairment might be a patent, where the patented technology has been overtaken by new, better or cheaper technology.
Accounting standards - Relevant accounting standards include IAS 36, Section 27 of FRS 102 and IAS 2.
The related accounting adjustment required to reduce the carrying amount of the asset in the balance sheet - to the new lower recoverable amount - and to recognise an impairment loss.
The accounting for impairment is very similar to depreciation.
The value of the asset is being written down faster / further than was anticipated when setting up the original depreciation schedule.
The reason for calculating and reporting impairment separately from depreciation is to provide more information about the split between:
- Expected write downs in value (depreciation) and
- Additional / unexpected ones, for example caused by damage.
In the period when the impairment is recognised there is both:
- A REDUCTION in the asset value in the Balance Sheet; and
- A CHARGE / expense in the Profit and Loss account.
Impairment is (almost) always a loss.
It affects both assets and profit - in the same way as depreciation expense and amortisation expense do.
More generally, any weakening, damage or reduction in value.
Causes of impairment may include damage, obsolescence and declining credit quality.