Impairment accounting records a reduction in the value of an asset reported in the accounts. It asks whether the recorded amount exceeds what is recoverable under the applicable standard. There is no single automatic method for every asset. We need the measurement basis, testing conditions and rules for reversing an earlier loss. An accounting loss must also be separated from an actual movement of cash.
International accounting standard IAS 36 compares carrying value with what can be recovered through use or sale. It covers many assets, but not all. IAS 2 deals with inventories; financial assets within IFRS 9 follow their own requirements, including expected credit losses where applicable. Those estimate losses from possible debtor nonpayment. A fall in market price therefore does not prescribe the same accounting entry across the company. First identify the asset and the rules used in the accounts. [1] [2] [3]
In our IAS 36 cost-model example, carrying value is 100 USD, US dollars. Fair value less disposal costs is 70 and value in use is 85. The former is a possible sale valuation after relevant costs; the latter is the present value of estimated cash flows from use. Recoverable amount is the higher figure: max(70,85)=85. The loss is therefore 15, not 30. Value in use discounts future money, converting it to today’s value. It is not simply the sum of future revenue. [1]
A machine may not generate separately identifiable cash if it only works as part of a production line. IAS 36 then uses the smallest group generating largely independent cash inflows: a cash-generating unit. Our two connected machines, with carrying values of 70 and 50, form a unit of 120. With recoverable amount of 100, the unit’s loss is 20. That does not mean charging the whole loss to the first machine. Allocation follows rules and limits for individual assets. [1]
IAS 36 requires annual testing for goodwill, indefinite-lived intangible assets and intangibles not yet available for use. Intangible assets have no physical substance. Goodwill is an acquisition-related asset representing benefits that cannot be separately assigned to identifiable assets; it does not simply mean a good reputation. An indefinite life means no foreseeable limit to the benefits, not immortality. For other assets, signs of possible impairment trigger the test. Those signs are assessed when preparing the financial statements; there is no automatic entry based on one market quote. [1] [4]
Imagine equipment costing 100 USD, with a useful life of 5 years and residual value of 0. Straight-line depreciation allocates its cost at 20 a year. After the first year, carrying value is 80. If testing shows recoverable amount of 60, an additional impairment loss of 20 arises. With an unchanged remaining life of 4 years, future annual depreciation becomes 60/4=15. Planned cost allocation over time and an additional write-down are different. This equipment example does not claim that native BTC depreciates over 5 years. [1]
Continue with the same equipment. Another year’s depreciation of 15 leaves carrying value of 45. Without the earlier impairment, it would be 60 after two depreciation charges of 20. Even if recoverable amount now rises to 90, meeting IAS 36 conditions permits restoration only to 60, an increase of 15, not 45. A better price alone is not the whole test: changed estimates and the no-prior-loss ceiling matter. IAS 36 never reverses goodwill impairment. [1]
The Financial Accounting Standards Board (FASB), the US accounting standard-setter, describes a former model for indefinite-lived intangible assets. An identified loss reduced carrying value and later reversal was forbidden. In our historical example, 1 BTC bought for 50000 USD is carried at 30000 after a properly determined loss at a value of 30000. A later rise to 60000 does not increase carrying value without a sale under that old model. ASU 2023-08 replaced this for in-scope cryptoassets (those meeting its conditions) with remeasurement through net income, mandatory for fiscal years beginning after 15 December 2024. These are US GAAP, the generally accepted accounting principles in the United States. Do not apply the old example to current in-scope assets or to IFRS, the International Financial Reporting Standards. [5]
In a separate example, a loss of 15 USD reduces both asset value and earnings by 15. The entry alone leaves bank cash of 20 unchanged; taxes and other transactions are excluded. The company needs 50 for a debt payment and is still short 30: 50−20=30. An indirect cash flow statement reconciles accounting profit to cash movement, so the noncash expense is added back. That adjustment creates no money. Alongside estimates and the test unit, examine actual liquidity, the ability to pay on time, and possible effects on ratios agreed in the loan contract. [6]
For the clearest picture, read this entry together with Fair value accounting, FASB ASU 2023-08, Cash flow, Credit risk. The reverse links also lead from Fair value accounting, FASB ASU 2023-08.