Impairment loss - Financial definition
Concise definition of the term impairment loss
Impairment loss refers to the decrease in the value of an asset, often due to factors like obsolescence or economic downturns.
Comprehensive definition of the term impairment loss
In corporate finance, impairment loss signifies a reduction in the carrying amount of an asset on a company's balance sheet when its recoverable amount falls below its recorded value. This typically occurs when the asset's future economic benefits are lower than expected, such as when technological advancements render equipment obsolete or when there's a decline in the asset's market value due to economic factors.
Companies are required to regularly assess their assets for impairment and recognize any losses in value, reflecting a prudent approach to financial reporting and ensuring the accuracy of the balance sheet's depiction of the company's true financial position. Examples include writing down the value of goodwill from an acquisition if its expected future cash flows decrease or recognizing impairment on property, plant, and equipment due to a decrease in demand for the products they produce.
Such assessments are crucial for maintaining transparency and credibility in financial reporting, aligning with accounting standards and regulatory requirements, and aiding investors and stakeholders in making informed decisions about the company's performance and prospects.