What is an impairment loss?

An impairment loss refers to a permanent reduction in the value of an asset below its carrying amount. This occurs when the recoverable amount of an asset—essentially the higher of its fair value minus costs to sell or its value in use—falls below the asset's current carrying value on the balance sheet. A company must recognize this loss in its financial statements, as it reflects a decline in future economic benefits expected from the asset.

This concept is crucial in financial accounting because it ensures that the asset is accurately represented on the balance sheet, promoting transparency and reliability in financial reporting. By recognizing an impairment loss, companies provide a clearer picture of their asset values and the potential economic benefits associated with them, which can impact investment decisions and assessments of the company's worth.