Impairment of assets
Also known as: impairment loss, asset write-down
Impairment of assets occurs when an asset's carrying value on the balance sheet exceeds the amount the company can recover through use or sale. The company must write the asset down and recognize an impairment loss on the income statement.
An asset is impaired when its book value no longer reflects economic reality — the amount recorded on the balance sheet is higher than what the asset can actually generate or fetch. Impairment commonly follows triggering events such as physical damage, obsolescence, a sharp decline in market value, or a downturn in the business that uses the asset.
Under US GAAP, long-lived assets like property, plant, and equipment are tested using a two-step approach: first compare the carrying amount to the undiscounted future cash flows the asset is expected to produce; if the carrying amount is higher, write the asset down to its fair value and recognize the difference as an impairment loss. Under IFRS, the test is one step: compare the carrying amount to the recoverable amount, defined as the higher of fair value less costs of disposal and value in use (the present value of expected cash flows).
The frameworks also diverge on reversals. IFRS permits a previously recognized impairment loss to be reversed (except for goodwill) if the asset's value recovers, while US GAAP prohibits reversals for assets held for use. These GAAP-versus-IFRS differences are classic exam fodder because they produce different financial statements from identical facts.
Asset impairment is tested on the CMA Part 1 exam within external financial reporting, including the PPE impairment model and the GAAP/IFRS differences, and on the ACCA Financial Accounting (FA) exam as part of the regulatory framework and measurement of long-lived assets. Know the test mechanics, where the loss is reported, and which framework allows reversals.
Key takeaways
- Impairment means an asset's carrying value exceeds its recoverable value, requiring a write-down.
- US GAAP uses a two-step test based on undiscounted cash flows, then writes the asset down to fair value.
- IFRS compares carrying value to the recoverable amount — the higher of fair value less costs of disposal and value in use.
- IFRS allows most impairment losses to be reversed; US GAAP does not for assets held for use.
- The CMA Part 1 and ACCA FA exams test impairment mechanics and the GAAP-versus-IFRS differences.