How Impairment Losses on Intangible Assets Are Recognized in the Income Statement

Impairment losses on intangible assets arise when the recoverable amount of an intangible—such as a patent, brand, software, or license—falls below its carrying value on the balance sheet. These losses ensure that assets are not overstated relative to the economic benefits they can generate. Under IFRS (IAS 36) and US GAAP (ASC 350), impairment losses are recognized immediately in the income statement, reflecting the decline in expected future cash flows associated with the asset.

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How impairment of intangible assets arises

Intangible assets may become impaired due to economic, technological, or regulatory changes that reduce their value. Common indicators include:

• Declining product sales or market share.

• Legal restrictions limiting asset use.

• Technological obsolescence (e.g., outdated software).

• Adverse changes in economic conditions or cash flow projections.

Example:A company carries a trademark at 800,000 but determines that its recoverable amount, based on discounted cash flows, is 500,000. It recognizes an impairment loss of 300,000, reducing both the asset’s carrying amount and profit for the period.

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Presentation in the income statement

Impairment losses are presented within operating expenses, typically under “Other Operating Expenses” or “Impairment of Intangible Assets.”

Example:

Item	Amount (USD)
Revenue	4,000,000
Cost of Goods Sold	(2,000,000)
Gross Profit	2,000,000
Selling and Administrative Expenses	(900,000)
Impairment of Intangible Assets	(300,000)
Operating Income	800,000

The impairment loss reduces both operating income and net income in the period recognized.

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Journal entries for impairment losses

To record impairment loss:

• Debit: Impairment Loss (Income Statement) 300,000

• Credit: Accumulated Impairment – Intangible Assets 300,000

To record complete write-off (if no recoverable value remains):

• Debit: Impairment Loss 800,000

• Credit: Intangible Asset 800,000

If the impairment relates to a cash-generating unit (CGU) that includes goodwill and other intangibles, losses are allocated first to goodwill, then to other assets on a pro rata basis.

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Standards under IFRS and US GAAP

• IFRS (IAS 36 – Impairment of Assets): Requires an annual impairment test for indefinite-lived intangibles and goodwill, and whenever indicators of impairment exist for finite-lived intangibles. The recoverable amount is the higher of fair value less costs of disposal and value in use (discounted future cash flows). Reversals of impairment (except for goodwill) are allowed if value recovers.

• US GAAP (ASC 350 – Intangibles – Goodwill and Other): Requires similar tests. For indefinite-lived intangibles, a qualitative assessment (“Step 0”) may precede quantitative testing. Reversal of impairment losses is prohibited under US GAAP.

Both frameworks require consistent application and transparent disclosure of assumptions used in valuation.

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Impact on financial performance and ratios

Impairment losses directly reduce operating income, net profit, and total assets, influencing profitability and leverage ratios. For example, a 300,000 impairment may lower return on assets (ROA) and equity, but improve future performance metrics by reducing amortization and asset base.

Market analysts often adjust earnings to exclude large, non-recurring impairment losses when assessing normalized profitability. However, frequent impairments may indicate poor acquisition decisions, declining brand strength, or misaligned forecasts.

Example:If total assets fall from 5,000,000 to 4,700,000 after impairment, and net income decreases by 300,000, both ROA and book value per share decline, signaling asset revaluation.

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Disclosures required for impairment losses

Entities must disclose:

• The nature and description of impaired assets.

• The amount of impairment loss recognized and any reversals.

• The basis for determining recoverable amount (value in use or fair value).

• Key assumptions used in cash flow projections (growth rate, discount rate).

• The segment or CGU affected by the impairment.

These disclosures provide transparency and enable users to evaluate management’s assumptions about asset performance and market conditions.

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Operational considerations

Impairment testing requires coordination between finance, valuation, and operational teams to ensure assumptions reflect realistic business prospects. Regular monitoring of market conditions and early detection of indicators helps prevent large one-time write-downs.

For management, impairment recognition is both an accounting requirement and a governance signal—it demonstrates commitment to accurate asset valuation. For investors, consistent and transparent impairment testing builds confidence in reported asset values, particularly in sectors where intangible assets dominate, such as technology, pharmaceuticals, and media.

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