How Impairment Losses Are Recognized in the Income Statement

Graziano Stefanelli
Oct 1
2 min read

Impairment losses represent the reduction in the carrying amount of an asset when its recoverable amount falls below book value. These losses are recorded in the income statement to reflect a decline in expected future economic benefits. Because impairments often involve significant judgment about cash flows, discount rates, and market conditions, their recognition has a major impact on reported profitability and equity.

·····

.....

When impairment testing is required

Under IFRS (IAS 36) and US GAAP (ASC 350 and 360), impairment testing is triggered when indicators suggest that an asset may no longer be fully recoverable. Common triggers include market declines, technological obsolescence, physical damage, or adverse regulatory changes.

IFRS requires annual testing for goodwill and indefinite-lived intangibles, regardless of indicators.
US GAAP requires annual goodwill tests, while other assets are tested only when impairment indicators exist.

This ensures that impairments are recognized promptly and that assets are not carried above recoverable amounts.

·····

.....

How impairment losses are measured

IFRS (IAS 36): The recoverable amount is the higher of fair value less costs of disposal and value in use (discounted future cash flows). Impairment equals the excess of carrying amount over recoverable amount.
US GAAP: For long-lived assets held and used, the test first compares carrying amount with undiscounted cash flows. If not recoverable, the impairment loss equals carrying amount minus fair value. For goodwill, the fair value of the reporting unit is compared with its carrying amount.

Example: If equipment with a carrying amount of 500,000 has a recoverable amount of 420,000, an impairment of 80,000 is recorded.

·····

.....

Journal entries to record impairment

To recognize an impairment loss:

Debit: Impairment Loss (Income Statement) 80,000
Credit: Accumulated Impairment (Asset) 80,000

If goodwill is impaired:

Debit: Impairment Loss 150,000
Credit: Goodwill 150,000

Under IFRS, impairment reversals are allowed for assets other than goodwill if recoverable amounts improve. Under US GAAP, reversals are prohibited.

·····

.....

Presentation in the income statement

Impairment losses are presented as part of operating expenses, usually within a separate line or disclosed clearly if material. They reduce operating income and net income for the period. Analysts often adjust performance metrics such as EBITDA, which excludes impairment because it is non-cash, but still recognize the impact on net earnings and equity.

·····

.....

Disclosures required by standards

Both IFRS and US GAAP require detailed disclosures when impairment losses are recognized, including:

Nature of the asset or cash-generating unit tested.
Amount of impairment recognized or reversed.
Methods and key assumptions used (discount rates, growth rates, forecast periods).
Sensitivity analyses under IFRS when small changes in assumptions could trigger impairment.

These disclosures allow users to assess the judgment and assumptions underlying impairment tests.

·····

.....

Operational considerations

Impairment losses are highly judgmental and can materially affect investor perceptions. Companies must maintain robust documentation of forecasts, discount rates, and valuation models to support impairment conclusions. For analysts, impairments are often treated as non-recurring charges, but repeated impairments may indicate structural issues with assets or strategy.

·····

.....

DATA STUDIOS

.....[datastudios.org]