Impaired Asset: Meaning, Causes, Testing & Recording (2026 Guide)

An impaired asset is any asset on a company’s balance sheet whose carrying value is higher than its recoverable amount. The ‘carrying value’ is the value listed on the balance sheet, while the ‘recoverable amount’ is the higher of an asset’s fair value less costs of disposal and its value in use (the present value of future cash flows expected from the asset).

Impairment can apply to tangible assets (like property, plant, and equipment), intangible assets (such as goodwill or patents), and even financial assets (like loans or receivables).

• Example: If a manufacturing machine is listed at $200,000 but due to technological advances is now only worth $120,000, the asset is impaired by $80,000.

• Key legislation: In Australia, the accounting standard AASB 136 (Impairment of Assets) sets out the rules for recognising and measuring impairment losses.

Asset impairment is typically triggered by events or circumstances that diminish the asset’s expected future economic benefits. Common causes in 2026 include:

• Market downturns: Falling property or share values can reduce the fair value of assets.

• Obsolescence: Rapid technological change can make equipment or software redundant before the end of its useful life.

• Physical damage: Fires, floods, or other disasters can reduce an asset’s value below its carrying amount.

• Regulatory changes: New environmental or safety standards may require costly upgrades, reducing asset value.

• Poor performance: If a business unit consistently underperforms, the goodwill attached to it may be impaired.

For example, the ongoing shift to renewable energy in Australia has caused impairment charges for fossil fuel assets across several ASX-listed companies. Similarly, the 2024-25 economic slowdown prompted many businesses to review the value of their commercial property holdings.

Under AASB 136, Australian businesses are required to conduct impairment testing whenever there is an indication an asset may be impaired – at least annually for intangible assets with indefinite useful lives (like goodwill).

• Identify indicators of impairment: These include external factors (market prices, legal changes) and internal factors (damage, underperformance).

• Calculate the recoverable amount: Determine the higher of fair value less costs to sell or value in use. This often involves discounted cash flow analysis, using reasonable and supportable assumptions about future cash flows and discount rates.

• Compare with carrying amount: If the recoverable amount is lower, recognise an impairment loss.

In 2026, ASIC has highlighted the importance of robust impairment testing, especially as interest rates and inflation impact asset values. ASIC’s financial reporting focus areas for 2026 encourage businesses to document their assumptions and ensure consistency with market data.

Recording an impairment involves reducing the asset’s carrying amount to its recoverable amount and recognising the loss in the profit and loss statement. Here’s how it works:

• Journal entry: Debit ‘Impairment Loss’ (an expense account), credit the relevant asset account.

• Disclosure: Australian Accounting Standards require detailed disclosures about the circumstances leading to impairment, the assumptions used, and the impact on financial results.

• Tax impact: Impairment losses may affect taxable income, but deductibility depends on asset type and specific circumstances. The ATO’s 2026 guidelines stress documentation and compliance.

Example: If a company’s goodwill is impaired by $100,000, the entry would be:

Impairment Loss $100,000 Goodwill $100,000 The impairment loss appears in the profit and loss statement, alerting stakeholders to the decrease in asset value.

• Perform regular asset reviews, especially after significant economic or regulatory changes.

  • Document all impairment testing assumptions and methodologies.

  • Consult updated AASB and ASIC guidance for compliance.

  • Communicate with auditors early if large impairment charges are likely.