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Reviewed by Sep 25, 2022| Updated on
The word impairment is associated with an asset which currently has a market value less than the book value of the asset. A test is performed to determine whether the book value of the asset should be reduced to the current market value, and report the amount of write-down (reduction) as a loss on its statement of income.
As per Accounting Standards (AS) 28, an impairment loss occurs when a fixed asset's value suddenly falls below its carrying costs. That means you can write off the difference if an asset's value decreases that the recoverable amount is less than the carrying cost.
The amount of assets recoverable is higher than the market value or the value in use. If the sale price is not determinable, then the value of use as the recoverable sum must be taken.
Unless the asset generates cash inflows from continued use that are largely independent of those from other assets or group of assets, the recoverable amount is determined for an individual asset as per ICAI. The recoverable amount of the cash-generating unit to which the asset belongs shall be calculated, unless either:
a. The net sale price of the asset is more than its carrying value. b. The value of the commodity in use can be measured between its net selling price, and the net selling price can be determined.
If the recoverable amount of the asset is higher than the carrying amount, then the difference amount must be ignored. Still, if the recoverable amount of the asset is less than the carrying amount, then the difference called Impairment Loss should be written off immediately and should be treated as a Profit & Loss account expense.