Impairment loss occurs when the carrying amount of an asset exceeds its recoverable amount — meaning the asset is worth less on the books than it could be sold for or generates in cash flows. Recognizing impairment is required under both US GAAP (ASC 360 for long-lived assets, ASC 350 for goodwill) and IFRS (IAS 36). Proper journal entries ensure your financial statements reflect economic reality rather than inflated asset values.
Quick Answer
When an asset is impaired, debit Impairment Loss (an income statement account) and credit the asset account or a contra-asset account (Accumulated Impairment Losses) for the impairment amount. The impairment amount equals the difference between the asset's carrying value and its fair value (US GAAP) or recoverable amount (IFRS). This write-down reduces future depreciation expense because the new carrying amount becomes the depreciated base.
What Is an Impairment Loss?
An impairment loss represents a permanent decline in the value of a long-lived asset, intangible asset, or goodwill. Unlike temporary market fluctuations, impairment signals that the asset will not generate sufficient future cash flows to justify its current book value.
Under US GAAP, impairment testing follows a two-step process for most assets: first, test for impairment by comparing the asset's carrying value to its undiscounted future cash flows. If impaired, measure the loss as the difference between carrying value and fair value. Under IFRS, a one-step approach compares carrying value to the higher of fair value less costs of disposal and value in use (the "recoverable amount").
For a related topic on fixed asset accounting, see our guide on journal entries for depreciation.
When to Test for Impairment
Impairment testing is required when events or changes in circumstances indicate that an asset may not be recoverable. Common triggers include:
- Significant decline in market value of the asset
- Physical damage to the asset
- Adverse changes in the business climate or legal environment
- Significant decrease in the asset's usage or expected output
- Operating or cash flow losses associated with the asset
- A decision to dispose of an asset before the end of its useful life
For goodwill and certain intangible assets with indefinite lives, annual impairment testing is required regardless of triggering events.
Impairment of Long-Lived Assets (ASC 360)
Under US GAAP, long-lived assets (property, plant, equipment, and amortizable intangibles) are tested for impairment when triggering events occur. The two-step test is:
Step 1 — Recoverability Test: Compare the asset's carrying value to its undiscounted future cash flows. If carrying value exceeds undiscounted cash flows, the asset is impaired.
Step 2 — Measurement: The impairment loss equals the excess of carrying value over fair value.
Example: Equipment Impairment
Titan Manufacturing has equipment with a carrying value of $120,000 (cost $200,000 less accumulated depreciation of $80,000). Due to a technological change, management estimates undiscounted future cash flows at $90,000 and fair value at $85,000. Since carrying value ($120,000) exceeds undiscounted cash flows ($90,000), the asset is impaired. The loss = $120,000 − $85,000 = $35,000.
Dr. Impairment Loss $35,000
Cr. Accumulated Depreciation — Equipment $35,000
To record impairment loss on equipment (carrying value reduced to fair value of $85,000).
After the write-down, the equipment's new carrying value is $85,000, and future depreciation is calculated on this adjusted base over the remaining useful life. For guidance on asset disposal following impairment, see our article on journal entries for asset disposal.
Impairment of Goodwill (ASC 350)
Goodwill is tested for impairment annually (or more frequently if triggering events occur). Under the simplified approach (ASU 2017-04), impairment is measured as the excess of a reporting unit's carrying value over its fair value, not to exceed the amount of goodwill allocated to that unit.
Example: Goodwill Impairment
Titan Manufacturing's reporting unit has goodwill of $150,000 on its books. The reporting unit's fair value falls to $800,000 while its carrying value is $950,000. The implied impairment loss is $150,000 (limited to the goodwill amount).
Dr. Goodwill Impairment Loss $150,000
Cr. Goodwill $150,000
To record full impairment of goodwill for the reporting unit.
For more detail on goodwill-specific impairment accounting, see our dedicated guide on journal entries for goodwill impairment.
Impairment Under IFRS (IAS 36)
IFRS uses a one-step approach: compare the carrying value to the recoverable amount (higher of fair value less costs of disposal and value in use). If carrying value exceeds the recoverable amount, recognize an impairment loss.
A key difference from US GAAP is that IFRS allows reversal of impairment losses for assets other than goodwill (with some limitations). US GAAP prohibits reversal of impairment losses once recognized.
Example: IFRS Impairment and Reversal
A machine has a carrying value of €100,000 and a recoverable amount of €70,000. Impairment loss = €30,000.
Dr. Impairment Loss (P&L) €30,000
Cr. Accumulated Impairment Losses €30,000
To record impairment of machinery under IAS 36.
Two years later, conditions improve and the recoverable amount rises to €85,000. The new carrying value (after two years of depreciation on €70,000) is €56,000. Under IFRS, the reversal is limited to the original impairment of €30,000, but only up to the amount that brings carrying value to what it would have been without the impairment (say €84,000). The reversal is €84,000 − €56,000 = €28,000 (limited to the original €30,000 cap).
Dr. Accumulated Impairment Losses €28,000
Cr. Impairment Reversal (P&L) €28,000
To reverse previously recognized impairment loss under IAS 36.
Impairment of Inventory
Inventory is subject to a lower-of-cost-or-market (US GAAP) or lower-of-cost-and-net-realizable-value (IFRS) write-down, which is functionally similar to impairment. When inventory's market value falls below cost, a write-down is required. This is covered in detail in our guide on journal entries for inventory adjustments.
Example: Inventory Write-Down
Titan Manufacturing has inventory with a cost of $40,000 and a net realizable value of $28,000. A $12,000 write-down is required.
Dr. Loss on Inventory Write-Down $12,000
Cr. Inventory (or Allowance to Reduce Inventory) $12,000
To write down inventory to net realizable value.
GAAP vs. IFRS: Impairment Comparison
| Feature | US GAAP | IFRS (IAS 36) |
|---|---|---|
| Test method | Two-step (recoverability then measurement) | One-step (recoverable amount) |
| Measurement basis | Fair value | Higher of fair value less disposal costs or value in use |
| Reversal allowed? | No (prohibited) | Yes (except goodwill) |
| Goodwill test | Annual, at reporting unit level | Annual, at cash-generating unit level |
| Cash flow discounting | Undiscounted for recoverability; discounted for fair value | Discounted (value in use) |
Key Takeaways
- Impairment losses are recognized when an asset's carrying value exceeds its recoverable amount — they are not optional.
- Under US GAAP, long-lived assets use a two-step test; goodwill is tested annually at the reporting unit level.
- Under IFRS, impairment is a one-step comparison to recoverable amount, and reversals are permitted (except for goodwill).
- After impairment, the reduced carrying amount becomes the new base for future depreciation and amortization.
- Inventory write-downs follow a separate framework (LCM or LCNRV) but serve the same principle of reporting assets at no more than their realizable value.
