Concept
What Is Impairment?
An asset is impaired when its carrying amount (book value) exceeds the future economic benefit it will provide. Under U.S. GAAP, impairment testing uses a two-step process for assets held for use.
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FARLesson 4 of 5
Impairment of Long-Term Assets
Concept
Two-Step Test (U.S. GAAP)
Step 1 (Recoverability Test): Is the carrying amount > undiscounted future cash flows? If YES, impairment exists. Step 2 (Measurement): Impairment loss = Carrying Amount − Fair Value. The asset is written down to fair value.
Key Point
Important Rules
Impairment losses are recognized on the income statement. Under U.S. GAAP, impairment losses on assets held for use CANNOT be reversed. Under IFRS, reversals are permitted (except for goodwill).
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