Impairment: Do you know what this is?

Have you heard about impairment and know what is the practical meaning of this term in the accounting and the balance of companies?

Whatever the assets your company has, it is very important that you know what is impairment and what this means for your balance sheet.

To understand the meaning of the concept and take all your doubts about it, continue with us and accompany this content by the end.

What is impairment?

impairment is a mechanism used in accounting to reduce the value of an asset (well or right) depending on events that have reduced its value or the expected financial return on good.

Standards and good accounting practices do not allow the value of an asset exceeds the return that If you expect to get at all times with it.

So, from the moment that a loss of value is identified in a certain asset, its value must be readily readjusted.

What is the difference between impairment and depreciation?

impairment and depreciation are two terms related to the reduction of the value of an asset in accounting, and as a consequence of this, the difference between concepts usually generates many doubts.

In view of this, you need to understand the following:

Depreciation: It has a direct relationship with the decrease in the value of an asset over an accounting period due to wear over time.

Ex: A car that is in use 5 years ago, does not have the same amount as when he left the dealership.

In practice, we can say that the depreciation of an asset is expected and its financial result is predictable.

impairment: it has a direct relationship with the sudden and unexpected drop of the value of an asset, due to related events.

Ex: A new product of a competitor makes its asset outdated, significantly reducing its market value.

What is impairment test?

Simplified manner, the impairment test is the procedure through which, the value of an asset in the balance sheet (book value) is compared to its estimated return value (recoverable value). / p>

Based on this, the test in question has two possible results:

• Accounting value Minor or equal to recoverable value: approved asset value

• Accounting value Greater than the recoverable value: asset value needs to be reduced.

  At first it may seem that the test is simple. However, complexity is related to the values that will be used as a basis for comparison.

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