impairmenttest

An impairment test is an accounting process used to determine whether the carrying amount of an asset or a group of assets exceeds its recoverable amount. If the carrying amount is higher than the recoverable amount, an impairment loss is recognized to reduce the asset’s carrying amount to its recoverable amount. The concept is most closely associated with international financial reporting standards, particularly IAS 36, but similar ideas appear in other frameworks.

The recoverable amount is defined as the higher of an asset’s fair value less costs of disposal and its value in use. Value in use is the present value of expected future cash flows from the asset or cash-generating unit, reflecting factors such as use, market conditions, and risks. Fair value less costs of disposal represents the amount obtainable from sale in an arm’s length transaction less costs of disposal.

Under IFRS, impairment testing is required for cash-generating units and, as a matter of policy, goodwill must be tested annually and when there are indicators of impairment. If an impairment is identified, the loss is recognized in profit or loss. The impairment loss is generally allocated to reduce the carrying amounts of assets in the unit, with goodwill written down first. Reversal of impairment losses is permitted for most assets but not for goodwill.

In the United States, impairment accounting under US GAAP uses a different approach, with an initial recoverability test based on undiscounted cash flows for long-lived assets and, if required, a measurement of impairment at fair value. Indefinite-lived intangibles are tested for impairment at fair value.