Understand impairment of assets in India with real-world examples. Learn when and why companies recognise impairment, applicable accounting standards, and its impact on financial statements.
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Impairment of Assets: When, Why and for What Purpose Companies Recognise It
Impairment of assets is a vital accounting concept that ensures companies present a true and fair view of their financial position. For Indian companies, recognising impairment is not just about following accounting rules—it reflects changing business realities, protects investors, and strengthens financial credibility. This article explains what impairment of assets means, when and why Indian companies recognise it, and how it is governed under Indian accounting standards.
What is Impairment of Assets?
Impairment of an asset occurs when its carrying amount (book value) exceeds its recoverable amount, meaning the asset is no longer capable of generating the expected economic benefits. The recoverable amount is the higher of the asset’s fair value less costs of disposal and its value in use.
Real-world example:
Telecom companies in India have impaired older 2G and 3G network equipment as rapid adoption of 4G and 5G technologies reduced the commercial usefulness of these assets.
Why Do Indian Companies Recognise Impairment?
Indian companies recognise impairment to ensure that asset values shown in financial statements reflect current economic conditions rather than outdated expectations. This prevents overstated profits and inflated balance sheets, helping investors and lenders make informed decisions.
Real-world example:
Several infrastructure companies have impaired toll road projects when traffic volumes fell significantly below original projections due to new competing highways.
Applicable Accounting Standards in India
The accounting treatment for impairment depends on the financial reporting framework followed by the company:
| Particulars | Ind AS 36 | AS 28 |
|---|---|---|
| Applicability | Ind AS-compliant companies | Indian GAAP companies |
| Basis | Aligned with IFRS | Pre-IFRS Indian GAAP |
| Annual Mandatory Testing | Goodwill and indefinite-life intangibles | Similar requirement |
| Measurement | Recoverable amount approach | Recoverable amount approach |
| Reversal of Impairment | Allowed (except goodwill) | Allowed (except goodwill) |
Both standards aim to ensure that assets are not carried at values higher than what they can realistically recover.
When is Impairment Testing Required?
Impairment testing is required whenever indicators of impairment are present. In addition, certain assets must be tested annually even if no indicators exist.
Common Indicators Triggering Impairment Testing
| Indicator Type | Examples |
|---|---|
| Market-based | Sharp fall in market value, reduced demand |
| Operational | Poor asset performance, declining cash flows |
| Technological | Asset becoming obsolete due to innovation |
| Regulatory | Environmental restrictions, license withdrawal |
| Economic | Industry downturn, recession |
Real-world example:
Coal-based power plants in India have been tested for impairment following tighter environmental norms and rising renewable energy adoption.
Assets Requiring Annual Impairment Testing
Under Ind AS 36, the following assets must be tested for impairment at least once every year, regardless of indicators:
- Goodwill
- Intangible assets with an indefinite useful life
- Intangible assets not yet available for use
Real-world example:
A pharmaceutical company acquiring a smaller firm must test the goodwill arising from the acquisition annually to ensure expected synergies are being achieved.
How is Impairment Measured?
Impairment is measured by comparing the carrying amount of an asset with its recoverable amount. If the carrying amount exceeds the recoverable amount, the difference is recognised as an impairment loss.
Real-world example:
A manufacturing plant recorded at ₹100 crore generates discounted future cash flows of only ₹70 crore. The company must recognise an impairment loss of ₹30 crore.
Accounting Treatment of Impairment Loss
An impairment loss is recognised in the Profit and Loss Statement, directly reducing net profit for the year. Simultaneously, the asset’s value in the balance sheet is reduced to its recoverable amount.
Impact of Impairment on Financial Statements
| Financial Metric | Before Impairment | After Impairment |
|---|---|---|
| Asset Value | ₹100 crore | ₹70 crore |
| Net Profit | ₹25 crore | ₹-5 crore |
| Net Worth | ₹80 crore | ₹50 crore |
Real-world example:
Indian steel and cement companies have reported large impairment losses during economic slowdowns, impacting profits but improving balance sheet accuracy.
Reversal of Impairment Loss
If economic conditions improve, impairment losses (except for goodwill) may be reversed. However, the revised carrying amount cannot exceed what the asset’s value would have been if no impairment had been recognised earlier.
Real-world example:
Airlines that impaired aircraft during the COVID-19 pandemic partially reversed those losses as passenger demand recovered post-pandemic.
Impairment vs Depreciation: Clearing a Common Confusion
| Basis | Impairment | Depreciation |
|---|---|---|
| Nature | Sudden loss in value | Gradual allocation of cost |
| Trigger | Unexpected decline | Passage of time |
| Frequency | As required | Every accounting period |
| Reversal | Allowed (except goodwill) | Not allowed |
Understanding this distinction is important, as impairment reflects economic deterioration, while depreciation reflects usage over time.
Why Impairment of Assets Matters
Impairment recognition enhances financial transparency, credibility, and comparability. It helps stakeholders understand whether assets are truly contributing to future earnings and prevents sudden financial shocks caused by delayed recognition of losses.
Real-world example:
Timely impairment recognition by Indian banks and NBFCs has helped clean up balance sheets and restore investor confidence during periods of financial stress.
In short: Impairment of assets is more than an accounting formality—it is a reflection of real business challenges and market dynamics. By recognising impairment at the right time, Indian companies improve financial discipline, comply with accounting standards, and maintain stakeholder trust. For investors and analysts, impairment disclosures often provide critical insights into long-term business sustainability.