Impairment
AccountingA write down of an asset whose carrying value on the balance sheet exceeds what it is actually worth.
Also written: write-down
Assets are usually carried at cost less accumulated depreciation, which says nothing about what they are currently worth. When an asset can no longer recover its carrying value, either through use or through sale, the difference is written off as an impairment.
It is a non cash charge, so it reduces profit and equity without touching the bank balance. On the cash flow statement it is added straight back, which is why a company can report a large loss and healthy operating cash flow in the same period.
Goodwill is the most scrutinised case, because goodwill is not amortised and is instead tested at least annually. A goodwill impairment is effectively management conceding that an acquisition did not deliver what was paid for it, which is why the announcement carries information well beyond the accounting.
Under IFRS, an impairment on most assets other than goodwill can be reversed if conditions improve. US GAAP generally prohibits reversal, which is a genuine comparability difference when looking at the same asset base under two frameworks.
Worked example
A cash generating unit carries goodwill of 200 within net assets of 800. Its recoverable amount falls to 650.
The 150 shortfall is written off against goodwill first, so goodwill falls to 50. Net income drops 150 with no tax relief, equity falls 150, and cash is entirely unaffected.
On the cash flow statement the 150 is added straight back as a non cash item, which is how a company reports a large loss and healthy operating cash flow in the same period.