An impairment test is an accounting procedure conducted to assess if an asset, such as a building, machinery, or intangible asset, like goodwill, has experienced a decrease in value that makes its book value higher than its recoverable amount. The recoverable amount is the greater of an asset’s fair value less costs to sell and its value in use. For example, if a company owns equipment recorded at a carrying value of $50,000 and an impairment test shows the recoverable amount is $40,000, the asset is considered impaired, and the company must recognize an impairment loss of $10,000 in its financial statements.

Impairment is typically tested when there are indications that an asset might be impaired, such as significant adverse changes in the market conditions, physical damage to the asset, or legal or regulatory changes limiting the asset’s usefulness. Regular assessments for impairment are required for certain assets, such as goodwill and intangible assets with indefinite useful lives, under accounting standards like IAS 36 and ASC 350.

This process ensures that financial statements accurately reflect the true value of assets, thereby providing reliable information to stakeholders. Businesses must disclose the details of impairment assessments, including the methodology and assumptions used, in their financial reporting.