Impairment in Accounting: What It Is and How It Works

Assets are recorded at cost, but their real value can fall, sometimes permanently. Impairment is how accounting recognizes that drop: when an asset is worth less on the books than it could actually recover, the company writes it down and takes the loss. It is a judgment-heavy area that shows up across fixed assets, goodwill, intangibles, and investments, and it can have a material effect on earnings.

This guide explains what impairment is, when and how it is tested, how it is measured under US GAAP and IFRS, the journal entry, and common examples.

What is impairment?

Impairment is a permanent reduction in the carrying value (book value) of an asset when that carrying value exceeds the amount the company can recover from using or selling it. When an asset is impaired, the company reduces its book value to the recoverable amount and recognizes an impairment loss on the income statement.

The core principle is conservatism: assets should not be carried on the balance sheet at more than they are worth. If events make an asset's book value unrecoverable, accounting requires writing it down now rather than pretending the value is still there.

Impairment is different from depreciation and amortization, which spread an asset's cost over its useful life in a planned way. Impairment is an unplanned, often one-time write-down triggered by a loss in value.

What triggers an impairment test?

Companies test for impairment when there is an indicator that an asset may have lost value, such as:

• A significant drop in market value of the asset.
• Adverse changes in technology, markets, the economy, or the legal environment.
• Physical damage or obsolescence.
• A decision to discontinue or restructure the operations the asset supports.
• Worse-than-expected cash flows or performance from the asset.

Goodwill and indefinite-lived intangibles are a special case: they must be tested for impairment at least annually, regardless of indicators, because they are not amortized.

How impairment is measured

The mechanics differ between the two main frameworks:

US GAAP (for long-lived assets)

A two-step approach. First, a recoverability test: compare the asset's carrying value to the undiscounted future cash flows it is expected to generate. If carrying value exceeds those cash flows, the asset is impaired. Second, measure the loss as the difference between carrying value and the asset's fair value.

IFRS (IAS 36)

A single-step approach. Compare carrying value to the recoverable amount, defined as the higher of (a) fair value less costs of disposal and (b) value in use (the present value of future cash flows). If carrying value exceeds the recoverable amount, the difference is the impairment loss.

A key difference: under IFRS, impairment losses on most assets (other than goodwill) can be reversed if value recovers; under US GAAP, impairment write-downs generally cannot be reversed.

The journal entry

To record an impairment loss:

• Debit Impairment Loss (an expense on the income statement)
• Credit the asset account, or its accumulated impairment/depreciation contra-account, reducing the asset's carrying value

For example, if a machine with a carrying value of $100,000 has a recoverable amount of $70,000, the company debits Impairment Loss $30,000 and credits the asset (or accumulated impairment) $30,000, leaving the machine on the books at $70,000.

Common examples

• Goodwill impairment. When an acquired business underperforms, the goodwill recorded at acquisition is written down, often a large, headline-making charge.
• Fixed-asset impairment. A factory or equipment made obsolete or idle by a shift in demand.
• Intangible impairment. A patent, license, or brand whose value has fallen.
• Inventory write-downs. A related concept, inventory carried at lower of cost or net realizable value.

How AI supports impairment work

Impairment is judgment-heavy, the decision to impair and the fair-value estimate require professional judgment that stays firmly with the accountant. But a lot of the surrounding work is data gathering and analysis: monitoring for impairment indicators, pulling the cash-flow data, assembling the carrying values, and documenting the test. AI agents can take on that preparation, surfacing potential indicators and compiling the support, so the team focuses on the judgment and the conclusion.

That division of labor, agents do the data work, humans own the judgment, is the pattern across modern financial close automation, with every figure traceable back to source for the auditors.

Frequently asked questions

What is impairment in accounting?

Impairment is a permanent reduction in an asset's carrying value when it exceeds the amount the company can recover from using or selling the asset. The company writes the asset down to its recoverable value and records an impairment loss on the income statement.

What is the difference between impairment and depreciation?

Depreciation (and amortization) is the planned allocation of an asset's cost over its useful life. Impairment is an unplanned, often one-time write-down recognized when an asset's value drops below its carrying amount. Depreciation is routine; impairment is triggered by a loss in value.

How is impairment calculated?

Under US GAAP, long-lived assets are first tested by comparing carrying value to undiscounted future cash flows; if impaired, the loss equals carrying value minus fair value. Under IFRS (IAS 36), the loss is carrying value minus the recoverable amount (the higher of fair value less costs to sell and value in use).

Can an impairment loss be reversed?

Under IFRS, impairment losses on most assets other than goodwill can be reversed if the asset's value recovers. Under US GAAP, impairment write-downs generally cannot be reversed. Goodwill impairments cannot be reversed under either framework.

The bottom line

Impairment keeps the balance sheet honest by writing assets down to what they can actually recover, with the loss hitting the income statement. It is tested when indicators arise (and annually for goodwill), measured differently under US GAAP and IFRS, and recorded by debiting an impairment loss and crediting the asset. The judgment stays human; the data work around it can be automated.

If you want the monitoring, data gathering, and documentation around close and impairment handled by AI agents, with every number traceable to source, talk to our team.