An assets is impaired under IFRS if it’s carrying(book) value EXCEEDS the recoverable amount.
In my mind, an impairment is not a good thing as the value of the asset declined unexpectedly … so why would an assets be IMPAIRED if it’s book value is MORE VALUABLE than the recoverable amount. Wouldn’t it be MORE valuable to the company if the asset’s book value is greater than the recoverable amount??
REALLY confused about this whole topic of impairment and write downs…
This is because IFRS insist on fair value reporting. This means that if asset fair (market) value is less than the book value in BS, asset has to be impaired. The financial reporting is directed to providing correct information to current and/or potential shareholders, not to retain the value of the company if there is no basis for it. Impairment tests are especially important for intangible assets with accent on Goodwill.
I think I get what your saying then. So if the book value is greater than the market value … then you need to write it down to the market value in order to provide shareholders with the most accurate value (which is market).
That makes a lot of sense now thinking of it like that. THANK YOU!
Be careful, IFRS impairment intention is required mostly to intangible long term assets, especially Goodwill. For tangible long term assets these requirements aren’t necessarily applied rigorously. For financial assets and short-term assets as inventory other procedures of fair value reporting applies. There is no unique common rule for all BS positions.