Plain definition
Impairment is a reduction in the carrying amount of an asset or cash-generating unit when its recorded amount exceeds the amount expected to be recovered through use or sale under the applicable requirements. It tests whether future benefits still support the amount on the balance sheet. Impairment is different from depreciation: depreciation allocates expected use; impairment responds to evidence that value has fallen more sharply or differently than expected.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A store has equipment with a carrying amount of . After losing its key location, management estimates recoverable amount at using supportable cash-flow and disposal information. It records a impairment loss and reduces the carrying amount. The decision is driven by evidence of reduced future benefit, not a desire to create a “cookie jar” reserve.
Indicators, cash-flow estimates, discounting, grouping of assets, reversals, and disclosures can be complex. A sales decline alone may be an indicator, not the final calculation.
Why it matters
If impairment is ignored, assets and profit can appear stronger while capacity no longer generates the expected returns. An unsupported impairment can do the opposite by depressing current profit and creating room for later gains.
Practical consequence
At each close, ask operational owners about idle assets, lost customers, damage, technology changes, and market declines. For material indicators, retain forecast assumptions, approval, sensitivity analysis, and valuation evidence. Compare later results with the estimate and disclose or seek specialist help where the framework requires.