Impairment is the estimated loss of value of an asset. There are certain circumstances that reduce the value of an asset that a company has purchased until it is eventually depreciates fully. In general, testing should be performed when there is evidence of impairment.The impairment test is an analysis that must be carried out by companies so that their assets reflect their true value.
Both the resolution of the ICAC and the international regulations (IAS 36) define the recoverable value as the greater of the following:
- Fair Value of an Asset (minus the sales cost)
- Value in Use
An asset is impaired when its carrying amount exceeds the recoverable amount.