An impairment loss is a recognized reduction in the carrying amount of an asset that is triggered by a decline in its fair value. It occurs when a business asset suffers a depreciation in fair market value in excess of the book value of the asset on the companys financial statements. The carrying amount is the acquisition cost of an asset, less any subsequent depreciation and impairment charges. Impairment losses are usually confined to high-cost assets, and the amount of these losses can be correspondingly large.

When testing an asset for impairment, the total carrying amount of the asset is compared to the recoverable amount, which is the higher of an assets fair value less costs to sell and its value in use. If the recoverable amount is less than the carrying amount, the asset is considered impaired, and the entity must reduce the carrying amount of the asset to its recoverable amount and recognize an impairment loss. An impairment loss records an expense in the current period that appears on the income statement and simultaneously reduces the value of the impaired asset on the balance sheet.

Impairment is most commonly used to describe a drastic reduction in the recoverable value of a fixed asset. The impairment may be caused by a change in the companys legal or economic circumstances or by a casualty loss from an unforeseeable disaster. Impairment losses are shown both on the income statement and the balance sheet. An accountant will write off the difference between the fair value and the carrying value if an impairment is present, and the value of the asset decreases on the companys balance sheet. The overall goal of asset impairment is to periodically evaluate a companys assets to make sure the total value of the assets is not being overstated.