Impairment

Impairment is a decrease in the value of an asset. It can be caused by a number of factors, such as physical damage, obsolescence, or changes in market conditions. Impairment can have a significant impact on a company's financial statements, as it can reduce the value of its assets and lead to lower profits.

There are two main types of impairment:

• Physical impairment occurs when an asset is damaged or destroyed. This can happen due to a number of factors, such as natural disasters, accidents, or wear and tear.
• Obsolescence impairment occurs when an asset becomes outdated or no longer useful. This can happen due to changes in technology, customer preferences, or government regulations.

Impairment is usually recognized when the carrying amount of an asset is greater than its recoverable amount. The recoverable amount is the amount that an asset could be sold for, or the amount that it could be used to generate future cash flows.

When an asset is impaired, the company must write down its value to the recoverable amount. This write-down can be recorded as an expense in the current period.

Impairment can have a number of consequences for a company. It can reduce its net assets and equity, and it can lead to lower profits. Impairment can also make it more difficult for a company to borrow money.

Companies are required to assess their assets for impairment on an annual basis. However, they may also need to assess their assets for impairment more frequently if there is evidence that the asset's value has decreased.

Impairment is an important concept for financial analysts to understand. It can have a significant impact on a company's financial statements and its ability to generate cash flows.