Impairment accounting: how to test and record losses
Learn when to test assets for impairment under US GAAP and how to calculate and record the loss.
Written by Lena Hanna—Trusted CPA Guidance on Accounting and Tax. Read Lena's full bio
Published Tuesday 6 October 2026
Table of contents
Key takeaways
- Impairment accounting records a permanent write-down when you can't recover an asset's carrying amount. It's sudden and unplanned, unlike scheduled depreciation or amortization.
- Under US Generally Accepted Accounting Principles (GAAP), triggering events prompt an undiscounted cash flow test. Failing assets lose carrying amount minus fair value.
- Goodwill is tested at least once a year. Private companies can instead amortize it over up to 10 years and test only after triggers.
- You record the loss as an expense and reduce the asset on your balance sheet. Under GAAP, you can't reverse it later.
What is impairment?
Impairment is a permanent write-down of an asset when its value on your books is more than you can recover from it. If you own fixed assets like equipment or vehicles, or intangible assets like patents or trademarks, impairment can apply when they lose value unexpectedly.
Depreciation and amortization reduce value on a planned schedule, while impairment happens suddenly. Picture a flood that wrecks your delivery van, or a competitor's product that makes your patent far less valuable. In both cases, the asset is worth less than your books show.
US GAAP requires you to recognize that drop as a loss on your income statement. Impairment accounting keeps your records accurate, so your books show what your business really owns.
What is the purpose of asset impairment?
Asset impairment makes sure your financial statements reflect reality after something unexpected cuts the value of what you own. Recording it on time helps you:
- keep your balance sheet from overstating assets hit by damage or market changes
- give lenders and buyers a clear picture of your financial health
- stay compliant with GAAP, which requires accurate asset values every reporting period
- decide whether to repair, replace, sell, or retire underperforming assets
Reliable figures also help when you apply for a loan or plan your next equipment purchase.
Types of assets that can be impaired
Most long-lived assets can be impaired, but the rules depend on the type. Here's how each category works.
Fixed assets
Fixed assets are physical, long-lived items your business uses to operate, such as equipment, vehicles, buildings, and machinery. Because you hold them for years, they're exposed to physical damage and technology changes.
Say your delivery truck is in a serious accident. Its value may drop well below its carrying amount, so you'd test it and record any loss.
Fixed assets also lose value gradually through accumulated depreciation. Impairment captures the sudden, unplanned drops a depreciation schedule doesn't cover.
Intangible assets
Intangible assets are non-physical items that still hold value, such as patents, trademarks, copyrights, and customer lists. They can become impaired when markets shift or competitors release better alternatives.
For example, a patent on outdated technology may lose most of its value when a new industry standard emerges. You amortize finite-lived intangibles over their useful life and test them whenever indicators suggest their value has dropped.
Goodwill
Goodwill is the premium you pay when you buy a business for more than the fair value of its identifiable assets. It reflects things like brand reputation and customer relationships.
Public companies don't amortize goodwill under GAAP. The Financial Accounting Standards Board (FASB) requires them to test it for impairment at least once a year.
Private companies can instead elect to amortize goodwill on a straight-line basis over up to 10 years, under Accounting Standards Update (ASU) 2014-02. If you make that election, you test goodwill only when a triggering event occurs, as outlined in this overview of the private company goodwill alternative.
Common impairment triggers
Certain events signal that an asset's value may have dropped below its carrying amount. For long-lived assets like equipment, testing is event-driven with no annual requirement, so spotting these triggers early keeps your books accurate.
External factors that may trigger an impairment test include:
- a sharp decline in the asset's market price
- major changes in technology that make the asset less useful or obsolete
- new laws, regulations, or industry standards that limit how you can use the asset
- a downturn in the broader economy or in your industry
- a sustained drop in your business's market value below its book value
Internal signs of impairment include:
- physical damage from accidents, natural disasters, or wear beyond normal use
- a plan to dispose of the asset well before the end of its expected life
- evidence that the asset's performance or output has declined sharply
- operating losses or negative cash flows connected to the asset
- a plan to discontinue or restructure the operations that use the asset
If any of these apply to an asset you own, run an impairment test as soon as you spot it.
How to test for asset impairment
Under US GAAP, Accounting Standards Codification (ASC) 360-10 sets a two-step test for long-lived assets you hold and use. You check recoverability first, then measure the loss, across these five steps.
Step 1. Identify impairment indicators
Start by reviewing your assets for signs their value may have dropped. Look for the external and internal triggers in the previous section, such as physical damage or new regulations.
If you find no indicators, you can skip testing that asset for now. Goodwill and indefinite-lived intangibles follow separate annual rules, covered in the goodwill section below.
Step 2. Determine the asset's carrying amount
The carrying amount is the asset's original cost minus accumulated depreciation or amortization and any past impairment losses. It's the value currently shown on your books.
Pull this figure from your accounting records. With straight-line depreciation, the carrying amount falls by the same amount each period, while other methods produce different figures at the time you test.
Step 3. Run the recoverability test
Add up the undiscounted cash flows you expect from the asset's use and eventual sale, then compare the total with its carrying amount. Undiscounted means you use the raw dollar amounts without converting them to today's value.
If the carrying amount is higher, the asset isn't recoverable and you move to Step 4. If the cash flows cover the carrying amount, you record no loss, even when the asset's fair value is lower.
Step 4. Measure the impairment loss
For an asset that fails the recoverability test, the impairment loss is its carrying amount minus its fair value. Fair value is the price a willing buyer in the market would pay for the asset today.
For a small business, estimating fair value often means getting an appraisal or checking comparable sales of similar assets. A qualified appraiser or your accountant can help you support the figure.
Step 5. Record the impairment loss
Record the loss in the period you identify it. Debit an impairment loss expense account and credit the asset account, or accumulated depreciation and impairment, for the amount of the loss.
The reduced amount becomes the asset's new carrying amount, and you base future depreciation on it. Keep your cash flow estimates and appraisals on file. Your financial statement notes should describe the impaired asset, what caused the loss, the amount, and how you measured fair value.
How goodwill impairment testing works
Goodwill follows its own impairment rules under ASC 350, because you can't sell or measure it on its own. You test it at the reporting-unit level, meaning an operating segment or one level below it.
Public companies, and private companies that haven't elected the amortization alternative, test goodwill at least once a year on the same date each year. You also test between annual dates if a triggering event occurs.
The goodwill test runs in this order:
- Test other assets in the reporting unit first, such as equipment and inventory, and record any impairment on them
- Run an optional qualitative assessment of whether it's more likely than not that the unit's fair value is below its carrying amount
- Compare the unit's fair value with its carrying amount, including goodwill, if the qualitative check points to a problem or you skip it
- Record a loss equal to the amount the carrying amount exceeds fair value, capped at the goodwill allocated to that unit
Since ASU 2017-04, this comparison is a single quantitative step. Say a reporting unit carries $400,000 on your books, including $50,000 of goodwill, and its fair value is $330,000. The $70,000 shortfall is more than the goodwill, so your loss is capped at $50,000.
Private companies get two simplifications. Under ASU 2014-02, you can amortize goodwill and test only after a triggering event. Under ASU 2021-03, you can evaluate triggering events only at the end of each reporting period instead of throughout it.
The rules may change. On July 29, 2026, FASB voted to add a new goodwill impairment project that could change the level and frequency of testing. The project could even remove the annual test, but FASB hasn't issued a new standard yet, so current rules still apply.
Where is impairment recorded?
You record impairment on both your income statement and your balance sheet. The journal entry recognizes the loss as an expense and reduces the asset's carrying amount.
Here's how it works in practice. Lakestar Machinery owns equipment with a carrying amount of $30,000. After hurricane damage, it expects the equipment to generate $27,000 in undiscounted future cash flows.
Because $27,000 is below $30,000, the equipment fails the recoverability test. An appraisal puts its fair value at $25,000, so the impairment loss is $30,000 minus $25,000, or $5,000.
Lakestar debits impairment loss for $5,000 and credits equipment, or accumulated depreciation and impairment, for $5,000. The equipment now shows $25,000 on the balance sheet, and the $5,000 loss reduces net income for the period.
How impairment affects your financial statements
An impairment loss flows through each of your main financial statements. Here's what changes in each one.
On your balance sheet, the asset's carrying amount falls by the amount of the loss. Total assets drop, and because net income falls, retained earnings and total equity decline too.
On your income statement, the loss appears as an expense in the period you record it, which reduces net income. A large write-down can noticeably dent reported profit, and lenders may ask about it.
On your cash flow statement, impairment has no direct effect because it's a non-cash expense. In the operating activities section, you add the loss back to net income.
Key differences: impairment, depreciation, and amortization
Impairment, depreciation, and amortization all reduce asset values on your books, but they apply in different situations. Knowing which one applies helps you record each correctly.
Depreciation is the planned, gradual reduction in the value of fixed assets like equipment and buildings. You spread the cost over the asset's useful life on a set schedule, so it's predictable.
Amortization works the same way for intangible assets with finite lives, such as patents and software licenses. You reduce the value over a set period using a systematic method.
Impairment is unplanned and event-driven, and it can apply to any asset type covered above. When you can't recover an asset's carrying amount, you record the loss at once instead of spreading it over time.
International Financial Reporting Standards (IFRS) use a different approach under International Accounting Standard (IAS) 36, comparing carrying amount with a recoverable amount. IFRS also lets you reverse impairment losses on assets other than goodwill, while US GAAP bars reversals on assets you hold and use.
Examples of asset impairment in small businesses
Impairment can hit any business, and for smaller operations it often starts with a single asset. These examples show how the test plays out.
A local restaurant owns a specialized pizza oven with a carrying amount of $10,000. New health regulations make the oven non-compliant, and modifying it isn't cost-effective.
Because the restaurant can't use the oven, its expected cash flows fall well short of $10,000, so it fails the recoverability test. Its fair value is $1,500 for parts, so the restaurant records an $8,500 impairment loss.
A construction company's excavator, carried at $50,000, is damaged in a flood. The company's estimate of undiscounted future cash flows comes in below $50,000, so the machine fails the recoverability test. Its fair value is now $20,000, so the company recognizes a $30,000 impairment loss and bases future depreciation on the new $20,000 carrying amount.
A small marketing agency bought a local competitor for $200,000, with $60,000 allocated to goodwill. Two years later, the acquired client base has shrunk sharply.
At its annual goodwill test, the reporting unit's carrying amount exceeds its fair value by $35,000. That's below the $60,000 of goodwill, so the agency records a $35,000 goodwill impairment loss.
Manage asset impairments with Xero
Impairment accounting comes down to spotting triggers early and testing with accurate figures. When your asset records are up to date, each step is quicker and your statements stay reliable.
Xero helps you manage your fixed assets in one place, with carrying amounts and depreciation kept current. You can run reports and share up-to-date financials with your accountant anytime, so every test starts from reliable numbers.
Explore Xero's plans and get one month free to see how it fits your business.
FAQs on impairment accounting
Here are answers to common questions about impairment accounting for small businesses.
When is impairment testing required for small businesses?
Impairment testing applies when you prepare financial statements under US GAAP, for example, statements a lender or investor asks for. If you only keep tax-basis records, ask your accountant which rules apply, since tax treatment of write-downs differs.
Can impairment losses be reversed under GAAP?
No, for assets you hold and use, the written-down amount becomes the asset's new cost basis. You depreciate from that lower figure even if the asset's market value later recovers.
What happens if you don't record impairment properly?
Your assets and profit end up overstated, which can mislead a lender or buyer relying on your statements. If an auditor finds the error later, you may need to restate prior-period financial statements.
How often should assets be tested for impairment?
Test long-lived assets such as equipment whenever a triggering event suggests their value may not be recoverable. Goodwill and indefinite-lived intangibles need testing at least once a year, though private companies using the amortization alternative test goodwill only after a triggering event.
Can private companies amortize goodwill?
Yes, you can elect to amortize goodwill straight-line over 10 years, or less if a shorter life fits better, for both existing and future goodwill. The election also lets you test goodwill at the entity level instead of by reporting unit.
Do assets held for sale follow different impairment rules?
Yes, once an asset meets the held-for-sale criteria, you measure it at the lower of its carrying amount or fair value less cost to sell. You also stop depreciating it while it's classified as held for sale.
Disclaimer
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.