impairmenttarkistukset

Impairmenttarkistukset, often translated as impairment tests or impairment reviews, are a crucial accounting procedure. Their primary purpose is to ensure that the carrying value of an asset on a company's balance sheet does not exceed its recoverable amount. This recoverable amount is the higher of the asset's fair value less costs to sell or its value in use.

Impairment testing is triggered when there are indications that an asset may be impaired. These indicators can be internal, such as significant adverse changes in the business environment, technological obsolescence, or physical damage to the asset, or external, like a decline in market value or adverse legal factors. If an indicator of impairment is identified, the company must perform a formal impairment test.

The process involves estimating the asset's future cash flows and discounting them back to their present value to determine its value in use. Alternatively, market data might be used to estimate fair value less costs to sell. If the carrying amount of the asset is greater than its recoverable amount, an impairment loss is recognized in the income statement. This loss reduces the asset's carrying value on the balance sheet to its recoverable amount. Impairment testing is a complex process that requires significant judgment and estimation, and it is a key component of financial reporting accuracy.