Impairment refers to a permanent reduction in the recoverable value of an asset below its carrying amount recorded in the balance sheet. It occurs when an assetís market value or utility declines due to changes in economic conditions, technology, market demand, or other factors, making it less valuable than initially expected.

In accounting terms, impairment ensures that the companyís financial statements reflect the true economic value of its assets. When impairment is recognized, the company records a loss in the income statement to adjust the assetís book value to its recoverable amount ó the higher of its fair value less costs to sell or its value in use.

Example: Suppose a manufacturing company purchases machinery worth ?50 lakh, but due to technological upgrades, the machinery can now be sold only for ?30 lakh or generates discounted future cash flows of ?32 lakh. The recoverable amount is ?32 lakh, meaning the company must record an impairment loss of ?18 lakh (?50 lakh - ?32 lakh).

Types of Assets Subject to Impairment:

• Tangible assets ñ such as buildings, machinery, or equipment.
• Intangible assets ñ such as goodwill, trademarks, or patents.
• Financial assets ñ like loans or receivables, when the borrowerís repayment ability weakens.

Why It Matters: Impairment is critical for ensuring transparency and accuracy in financial reporting. Regular impairment testing helps investors and regulators assess a companyís financial health and asset management efficiency. Under accounting standards such as Ind AS 36 or IAS 36, companies are required to test assets for impairment annually or whenever there is an indication of decline in value.

By recognizing impairment promptly, businesses maintain realistic valuations and build investor confidence through responsible financial disclosure.