ASSET IMPAIRMENT: Recognition, Measurement, and Reversal (IFRS vs. GAAP)

Asset impairment occurs when the carrying amount of a long-term asset exceeds its recoverable amount.

This accounting adjustment ensures that assets are not overstated on the balance sheet and reflects a decline in future economic benefits.

An asset is impaired when it is no longer expected to generate sufficient future cash flows to recover its book value.

Common impairment triggers:

Applies to tangible assets (property, plant, and equipment), intangible assets, and goodwill.

Under US GAAP (ASC 360) and IFRS (IAS 36), the process to recognize impairment differs.

Step	US GAAP	IFRS
Trigger assessment	Only if impairment indicators exist	Annual testing for some assets (e.g. goodwill)
Recoverability test	Undiscounted cash flows < carrying amount?	Not required
Impairment amount	Carrying amount – fair value (discounted)	Carrying amount – recoverable amount
Reversal permitted	No	Yes (except for goodwill)

Once impairment is confirmed, the asset’s carrying value must be reduced to its recoverable amount:

For GAAP: recoverable = fair value
For IFRS: recoverable = higher of fair value less costs to sell and value in use

Journal entry for impairment loss:

Example:

An asset has a book value of €120,000. Recoverable amount: €85,000.

The asset’s net carrying value becomes €85,000.

Under GAAP, assets are tested individually or at the asset group level.
Under IFRS, testing is often done at the Cash-Generating Unit (CGU) level—a group of assets that generate independent cash flows.

Goodwill is tested at the reporting unit (GAAP) or CGU (IFRS) level annually, even if no indicators exist.

Asset Type	Key Notes
PPE (Property, Plant, Equipment)	Test only when triggers exist
Intangibles with definite life	Subject to amortization and impairment
Intangibles with indefinite life	Test annually or when impairment is indicated
Goodwill	Tested annually for impairment, cannot be reversed under GAAP
Right-of-use assets	IFRS 16 / ASC 842 requires impairment if usage changes materially

IF an asset’s recoverable amount increases in future periods:

Reversal entry:

But the asset cannot be written up above what it would have been if no impairment had occurred.

Income Statement:
- Impairment loss reduces net income in the period recognized
Balance Sheet:
- Asset’s carrying value is adjusted downward
Cash Flow Statement:
- Non-cash item, added back to net income in operating activities

IF impairment is recognized or reversed, financial statements must disclose:

Key take-aways

Asset impairment reflects permanent declines in asset value and is required when recoverability is questionable.
Under GAAP, impairment is based on undiscounted cash flow tests; under IFRS, it's based on recoverable amount.
Reversals are allowed under IFRS (except goodwill) but not under GAAP.
Transparency through testing and disclosure protects stakeholders and ensures realistic asset reporting.

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