impairment
A reduction in the value of an asset when its carrying value on the balance sheet exceeds its recoverable value, requiring a write-down.
Example
“After the acquisition failed to generate expected revenue, the company recorded a $500M goodwill impairment charge.”
Memory Tip
IMPAIRMENT = an asset's value is IMPAIRED (damaged). The balance sheet value must be written down.
Why It Matters
Understanding impairment helps you recognize when investments or assets you own have lost significant value, which affects your net worth and financial statements. This knowledge is essential for making informed decisions about whether to hold, sell, or write down assets in your personal portfolio or business.
Common Misconception
Many people think impairment means an asset has simply decreased in market price temporarily, but it actually represents a permanent reduction in value that requires accounting recognition. The key difference is that impairment is about recoverable value, not just short-term price fluctuations.
In Practice
Suppose you purchased commercial real estate for 500,000 dollars, but due to neighborhood decline and reduced rental demand, its recoverable value drops to 300,000 dollars. You would record an impairment charge of 200,000 dollars on your financial statements, reducing the asset value and recognizing the permanent loss rather than hoping the market rebounds.
Etymology
From Old French 'empeirer' (to make worse) — an asset's value becomes IMPAIRED (damaged, reduced).
Common Misspellings
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Related Terms
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See Also
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