Impairment

Assets are recorded at cost, less any depreciation or amortization. Sometimes, however, something happens that makes an asset worth much less than its book value. A factory may become unprofitable, technology may become obsolete or an acquired business may perform far worse than expected. When this happens, the asset is impaired.

Accounting rules require companies to test assets for impairment when there are signs of a problem, and to test goodwill and certain other intangibles at least once a year. If the asset's recoverable amount, broadly the higher of what it could be sold for and the value of the cash it will generate, is below its book value, the difference is recorded as an impairment loss.

For example, if a company paid 50 million for a business, recorded as goodwill and other assets, and that business is now worth only 30 million, the company may record an impairment loss of 20 million.

Impairment losses reduce profit and asset values. Large impairments often signal that a past acquisition or investment did not work out as planned.