What is an asset impairment?

Definition

An asset impairment is the extra cut you record when a long-lived item will not earn back the amount still sitting on the books. On the books, this is a reduction of an asset, paired with an expense in the same period.

The leftover book amount is original cost minus write-offs already taken. When that leftover amount is no longer recoverable, the gap comes off the asset.

This is not a sale, and it is not the planned wear you already record each period. The item can still be in use, and only the reported amount changed.

Accrual books take the charge when the loss becomes clear. Cash-basis books often never show a separate write-down, because they never capitalized the item in the first place.

Where it shows up

Balance Sheet: Related to writing a long-lived asset down.

P&L: Related to the impairment charge in the period.

See also: Net Book Value · Adjusting Journal Entry · Non-Cash Expenses

When you look at your Balance Sheet, the impaired item sits with the non-current assets, at a lower amount than before. The write-down lands on the asset line, not as a separate pile of cash.

The Income Statement takes the impairment charge in the period you record it. Profit falls by that amount even though no cash left the bank.

This event does not show up as a payment on the Statement of Cash Flows. The charge is added back when you start from profit, because cash never moved.

A large write-down usually means the item's prospects changed. No write-down just means the remaining book amount still looks recoverable.

How it works

An impairment starts with a trigger. Demand falls, a machine fails for good, a location closes, or a cheaper substitute appears.

You then compare the remaining book amount to what the item can still bring in. If the remaining amount is higher, the difference is the impairment.

What it can still bring in is the cash the item is expected to generate, plus anything you could sell it for at the end. You are not marking the item to a showroom sticker price.

The write-down is recorded at period end as an adjusting entry. It is not a vendor bill, and it is not a cash payment.

You debit an impairment loss and credit the asset, or a contra account against it. Either way, the leftover book amount on the Balance Sheet falls.

Cash does not move. The assets just got smaller, and profit got smaller by the same amount.

After the write-down, later depreciation uses the new lower amount. You do not keep spreading the old, too-high balance.

US GAAP does not let you write the asset back up later if prospects improve. The lower amount stays until you sell or retire the item.

A small gap against book value may not be worth booking. The test is whether the difference is large enough to matter to a reader of the statements.

Keep the workpapers that support the new amount. A reviewer should be able to see the trigger, the old book amount, and the cash you still expect.

Physical items and purchased rights can both be impaired. The test is the same: remaining book amount versus what the item can still earn.

Example

A day spa bought a row of hydrotherapy tubs for $40,000. After two years of use, the remaining book amount is $24,000.

A new clinic opens next door with cheaper treatments. The spa's own tubs will now earn only $8,000 over their remaining life.

The extra $16,000 on the books is no longer recoverable. The spa records:

Debit: Impairment loss $16,000

Credit: Hydrotherapy tubs $16,000

The tubs now sit at $8,000 on the Balance Sheet. The $16,000 charge hits the P&L, and cash does not move.

Common mix-ups

Impairment is not the same thing as routine depreciation. Depreciation is the planned spread of cost; impairment is an extra cut when the plan no longer holds.

Impairment is not a sale or a disposal. The asset can still be in the room; only the book amount changed.

Impairment is not a cash refund. Profit falls, but the bank balance stays the same.

Related terms

• Net Book Value: An asset's original cost minus the depreciation recorded against it.
• Goodwill: The premium paid for a business above the fair value of its identifiable net assets.
• Adjusting Journal Entry: An entry made at period end to record accruals, deferrals, and corrections.
• Fixed Assets: Long-lived physical assets used to run the business rather than resold.
• Intangible Assets: Non-physical assets such as software, patents, and customer lists carried on the balance sheet.
• Materiality: The threshold at which an error or item is big enough to matter to a reader.
• Useful Life: The number of periods a fixed asset is expected to serve the business.
• Non-Cash Expenses: Charges that reduce profit without moving cash.