Impairment Loss refers to the reduction in the recoverable value of an asset below its carrying value (book value) as recorded in the company’s financial statements. In simpler terms, when the value of an asset—such as machinery, goodwill, or property—falls and can no longer be recovered through use or sale, the difference is called an impairment loss.
Under Indian accounting standards (Ind AS or AS), businesses are required to regularly assess their assets for signs of impairment. If impairment is identified, the loss must be recognized in the profit and loss statement for that financial year. This ensures the financial statements reflect a true and fair value of the company’s assets.
Impairment Loss is particularly relevant during business slowdowns, asset obsolescence, or legal restrictions affecting an asset's use. For example, if a manufacturing machine becomes outdated and no longer generates expected cash flows, its value may need to be reduced through an impairment loss.
Recognizing impairment loss is important for regulatory compliance, especially for companies preparing their books as per statutory requirements like the Companies Act, 2013, and during tax assessments or audits. Accurate reporting helps avoid penalties and ensures transparency with stakeholders.
Understanding and correctly accounting for impairment loss not only strengthens financial reporting but also helps businesses make informed decisions about asset replacement or restructuring.