Definition of Impairment
The term impairment is associated with an asset currently having a market value that is less than the asset’s book value . A test is done to determine whether the asset’s book value should be reduced to the current market value and to report the amount of the write-down (reduction) as a loss on its income statement.
Examples of Impairment
A meat packing plant in recent years invested large amounts in its plant and equipment. Since then, the company experienced a dramatic decline in the demand for its products and in the value of its plant and equipment. If the required test of impairment indicates that a loss must be recorded on its plant and equipment, its book value must be reduced and the resulting loss reported on its income statement.
A second example is Corporation X that acquired another company. The amount paid for the company resulted in Corporation X reporting a large amount for the intangible asset goodwill. Since the acquisition, the acquired company’s value has declined to only a small fraction of the amount currently reported as goodwill. A test must be done and it may require a reduction in the reported amount of goodwill and a resulting impairment loss reported on the company’s income statement.
