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What is an impairment?

Author:
Harold Averkamp, CPA, MBA

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.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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