Definition
Impairment charges reduce an asset's book value to fair market value when the carrying amount is no longer recoverable. Common for goodwill, intangible assets, and long-lived assets after adverse business changes. Impairment is a non-cash charge that reduces earnings but not cash flow. Large impairments, especially of goodwill, signal that prior acquisitions overpaid and destroyed shareholder value.
lightbulb Example
Company X acquired Company Y for $1B, creating $400M goodwill. Three years later, Y's business deteriorates. Annual impairment testing reveals fair value below carrying value, triggering a $250M goodwill impairment charge—reducing earnings by $250M with no cash impact.
verified_user Key Points
- Non-cash write-down of asset value
- Common for goodwill after failed acquisitions
- Reduces earnings but not cash flow
- Signals value destruction from prior investment decisions