Reduction of an asset's carrying amount when recorded value is no longer supported by recoverable or expected economic benefit.
Impairment is the accounting recognition that an asset’s carrying amount is too high and must be reduced. It arises when expected future benefit, recoverable amount, or fair-value-based support falls below the amount currently recorded in the accounts.
Impairment keeps assets from being overstated and often signals that operations, acquisitions, or market assumptions have weakened. Because impairment charges can be large, they can materially change both profit and balance-sheet strength.
Accountants look for indicators such as damage, obsolescence, falling cash flows, adverse market changes, or underperforming acquisitions. If the asset or reporting unit fails the relevant test, an impairment loss is recognized and the carrying amount is reduced through a write-down.
Impairment is different from routine depreciation or amortization. Depreciation and amortization allocate cost systematically over time, while impairment responds to a sharper drop in value or recoverable benefit.
A machine has a carrying amount of 90,000, but updated estimates show only 70,000 of recoverable value:
| Account | Debit | Credit |
|---|---|---|
| Impairment Loss | 20,000 | |
| Machinery or Impairment Adjustment | 20,000 |
After the entry, the asset is carried at 70,000.
Impairment is not just another word for depreciation. It also does not mean every market fluctuation creates an immediate accounting loss. The trigger depends on the reporting framework and the evidence that carrying value is no longer supportable.