Impairment of Assets

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What is impairment of assets?

Impairment of assets can be explained as a sudden or unexpected decline in an asset’s service utility, like factory, vehicle, or property. This might result from physical damage to the asset, changes to the legal code, or obsolescence resulting from technological innovation. It is, however, possible to write off impairment of assets.

According to IAS 36 "Impairment of assets", an impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.

Scope of Asset Impairment

The concept of impairment of assets applies to all assets excluding:

Recognizing an asset eligible for impairment

On every balance sheet date, all assets are reviewed to look for any indication about an asset which is eligible for impairment. There are certain indications of impairment like:

1. External sources include

i. market value declines

ii. increase in market interest rates

iii. company stock price is less than the book value

iv. negative changes in technology, economy, laws, or markets

2. Internal sources include

i. Asset as a part of a restructuring or held for disposal

ii. Obsolescence or physical damage

iii. Worse economic performance than what is expected

Advantages and disadvantages of Impairment of Assets


The advantages of impairment of assets are explained in the following points:

  • Impairment charges, if correctly applied, provide the analysts and investors with different ways to assess company management and its decision taking track record. Managers who write off or write down assets because of impairment have not made god investment choices.
  • Many business failures are heralded by a fall in the impairment value of assets. Such disclosures act as early warning signals to creditors and investors.


The disadvantages of asset impairment are explained in the following points:

  • It can be, sometimes, quite difficult to determine the measure of value which should be used while assessing an impairment. The most common options include current market value, current cost, NRV, or the sum of future net cash flows from the income-producing unit.
  • The detailed guidance on accounting for impairment of assets is little, like when to recognize impairment, how to measure impairment, and how to disclose impairment. 

Quote Guest, 15 March, 2013
what is the purpose of impiarment of assets
Quote Vit. A., 16 March, 2013
Guest wrote:
what is the purpose of impiarment of assets
The purpose is to have book (balance) value of assets close to its market value.
Quote Guest, 19 March, 2013
Whenever an asset's recoverable amount falls below its carrying value, the asset should be impaired. From what I've read on the web it calculates the 'write-offs' of assets.
Quote Guest, 25 October, 2019
what if there is no reliable measurement of impairment loss but the useful life of the asset decresed? Should impairment loss be recorded?
Quote Mukanya, 28 March, 2020
             3.      Mbada Ltd has a printing machine with a carrying amount of $5 250 000.  
This machine was bought 3 years ago and its original useful life was 8 years.  Due to technological changes in the market, the machine is expected to be used for another 3 years with net cash inflows of $2 800 000, $2 500 000 and $1 850 000 before it is disposed of for $600 000.

The current market value of the machine is $2 150 000 while disposal costs would amount to $350 000.  These costs will rise to $840 000 at the end of the third year.  The company’s cost of capital is 30%.


Determine the amount to be recognised in the company’s books as an impairment loss. [13]

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