asset impairment
Suppose your company owns a specialized factory carried on the books at 10 million. Then the product it makes becomes obsolete almost overnight — demand collapses, and the factory will never again earn anything close to what its records claim. Holding it at 10 million would be a comfortable lie. Honesty demands you mark it down to what it is really worth now. That deliberate write-down of an asset that has lost value is impairment.
Asset impairment occurs when the recoverable amount of a long-lived asset drops below its book value — that is, the asset can no longer be expected to recover what it is carried at, whether through use or sale. When that happens, accounting rules require writing the asset down to its recoverable (or fair) value and recognizing the shortfall as an impairment loss on the income statement. For instance, a machine carried at 8,000 that, after a market collapse, can realistically recover only 3,000 must be written down by 5,000, and that 5,000 hits profit as an impairment loss. Impairment is triggered by events — technological obsolescence, market collapse, physical damage, legal changes — not by routine wear, which depreciation already handles.
Impairment matters because it forces the balance sheet to tell the truth when an asset has genuinely soured, and it embodies the conservatism principle: recognize losses promptly, do not wait. It is especially important for goodwill and other intangibles, which are tested for impairment regularly. Two honest caveats: under US GAAP an impairment write-down generally cannot be reversed later even if value recovers (IFRS allows reversal for some assets), and because recoverable value rests on estimates of future cash flows, impairment involves real judgment and is sometimes used to 'take a big bath' — dumping bad news into one already-bad year.
A company carries a custom machine at a book value of 8,000. A new technology suddenly makes the product it builds nearly worthless, and the machine can now recover at most 3,000 through use or sale. The company writes the asset down to 3,000 and records a 5,000 impairment loss, reducing both the asset and this year's profit.
When an asset's recoverable value sinks below book value, it is written down and the shortfall hits profit.
Impairment is for sudden, event-driven losses of value, not routine wear (that is depreciation). Under US GAAP these write-downs generally cannot be reversed later, so they are not undone if conditions improve.