Asset impairment in plain language
Asset impairment is what you recognise when an asset is worth less than the books say, for a reason other than the passage of time. Depreciation handles time. Impairment handles everything else. Impairment is what happens when an asset is worth less than the accounts say it is. Depreciation is a planned reduction; impairment is an unplanned one. Recognising it depends on information your register either holds or does not, which is why it so often turns into a scramble at year end.
In this article
Asset impairment: the short version
- Depreciation is planned; impairment is a response to something going wrong.
- You assess for indicators every reporting period, and estimate recoverable amount only where indicators exist.
- Condition, idle status and last verification date are the register fields that make testing possible.
- Obsolescence usually arrives by class, not by individual asset.
- The hardest audit question is why an asset your register calls obsolete still carries a value.
The difference between depreciation and impairment
Depreciation spreads the cost of an asset across the periods that benefit from it. It is planned, systematic and applied whether or not the asset is doing well.
Impairment is a write-down because something has gone wrong. The asset is damaged, obsolete, idle, or the operation it belongs to is no longer generating what it was expected to. The reduction is recognised when the situation is identified, not spread over time.
An asset can be both fully on schedule for depreciation and impaired, and the two calculations are separate.
When you have to look
Under IAS 36, an entity assesses at the end of each reporting period whether there is any indication that an asset may be impaired. If there is an indication, the recoverable amount is estimated.
The indicators the standard points to fall into two groups.
External: a significant decline in market value, adverse changes in the technological, market, economic or legal environment, increases in interest rates affecting value in use, or the carrying amount of net assets exceeding market capitalisation.
Internal: evidence of physical damage or obsolescence, the asset becoming idle, plans to discontinue or restructure the operation it belongs to, plans to dispose of it earlier than expected, or evidence that its economic performance is worse than expected.
The register fields that make this possible
| Field | Why impairment testing needs it |
|---|---|
| Condition | The most direct internal indicator. An asset recorded as obsolete or needing replacement is flagging itself. |
| Location and department | Impairment is often tested at the level of a cash-generating unit, which usually maps to a site or an operation. |
| In-service and idle status | An idle asset is an explicit indicator. A register that cannot show idle assets cannot surface them. |
| Carrying amount per asset | The number you are comparing recoverable amount against. |
| Category | Obsolescence tends to arrive by class, particularly in IT and medical equipment. |
| Last verification date | Evidence that condition data is current rather than three years old. |
Notice that none of these are exotic. They are the standard fields of a properly maintained register, which is the point: impairment testing is difficult mainly for organisations whose condition data is stale.
Recoverable amount, briefly
Recoverable amount is the higher of fair value less costs of disposal, and value in use. If the carrying amount exceeds it, the difference is an impairment loss.
Fair value less costs of disposal is what you could sell it for, net of selling costs. Value in use is the present value of the future cash flows expected from the asset. For most individual items of equipment the first is more practical to establish; for assets that only generate cash as part of a larger operation, testing usually happens at the level of that unit rather than the individual asset.
The calculation itself is your accountant’s territory. What the register contributes is the population, the carrying amounts and the condition evidence.
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The practical process at year end
1. Run the register by condition. Pull everything recorded as obsolete, needing replacement or damaged. That is your first candidate list, and it should come from a verification within the year rather than from memory.
2. Run the idle list. Assets in store, decommissioned or awaiting disposal. Idle is an indicator in its own right.
3. Look at whole classes. Technology obsolescence rarely affects one laptop; it affects a generation of them.
4. Look at units, not just items. A site that has stopped operating impairs the assets in it regardless of their individual condition.
5. Hand the candidate list to finance with carrying amounts and condition evidence attached, early enough to be assessed rather than the week before the audit.
Reversals, and the one big exception
Impairment losses on property, plant and equipment can be reversed if the circumstances that caused them change, but only up to the carrying amount that would have applied had no impairment been recognised. You cannot use a reversal to write the asset back up above its depreciated cost.
The exception worth knowing is goodwill, where impairment losses are never reversed. That is outside the fixed asset register, but it comes up in the same conversation often enough to be worth stating.
What auditors ask about impairment
Three questions, in our experience. Did you assess for indicators at the reporting date, and can you show how? What is your evidence that assets recorded as being in use are actually in use? And why is this asset, which your own register says is obsolete, still carried at a positive net book value?
The third question is the uncomfortable one, and it is entirely answerable if condition data is current and the candidate list was reviewed. It is very hard to answer if the register has not been verified in three years.
Common questions about asset impairment
Is impairment the same as writing an asset off?
No. Impairment reduces the carrying amount to recoverable amount while the asset remains in use. A write-off removes it entirely, normally because it is disposed of or has no remaining benefit.
Do we have to test every asset every year?
No. You assess whether indicators exist. Only where they do must recoverable amount be estimated.
What if we cannot estimate value in use for a single machine?
That is common, and it is why testing often happens at the level of the cash-generating unit the asset belongs to rather than the individual item.
Does an idle asset have to be impaired?
Idleness is an indicator, not a conclusion. It triggers the assessment; the assessment decides whether a loss exists.
Who decides the impairment amount?
Your finance team, with your auditor, and often a valuer. The register supplies the population, carrying amounts and condition evidence.
Is this article accounting advice?
No. It is a plain-language summary to help you understand what your register needs to support. Apply the standards with your accountant.
The most common asset impairment in practice is the simplest: equipment that is broken, obsolete or has not been used in two years and is still carried at cost. A condition report finds most of it.
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