Impairment

Impairment concerns assets that fall unexpectedly in value. It is an accounting process in which the value of an asset is reduced because of a lasting fall in value, in order to adjust the asset's carrying amount to its current fair value.

How impairment is calculated

Impairment is calculated by assessing the fall in the asset's value and finding the difference between its carrying amount and its current fair value. The difference is then deducted from the asset's carrying amount, and the adjusted value is recognised in the balance sheet.

Say a business has a machine carried at NOK 300,000, but because of technological developments its real value is now only NOK 200,000. The difference of NOK 100,000 is written down, so that the machine's carrying amount is reduced from NOK 300,000 to NOK 200,000. The impairment is recognised as a cost in the profit and loss account in the year in which the fall in value is identified.

Impairment differs from ordinary depreciation in that depreciation is planned and expected, whereas impairment occurs when the fall in value is unexpected and material, for example through technological obsolescence, damage to the asset or a lasting failure of the market. If the basis for the impairment later ceases to apply, the impairment must be reversed to the extent that the basis is no longer present (section 5-3 of the Norwegian Accounting Act). The exception is goodwill, which cannot be written back up. The goodwill prohibition applies both under Norwegian good accounting practice and under IFRS.

What can impairment be used for?

Impairment is used to reflect the actual value of assets in a company's accounts. It contributes to a more accurate presentation of the company's financial position and results.

Tips for assessing impairment

• Carry out regular impairment tests in order to identify any falls in value that require a write-down.
• Use the right method, adapted to the nature of the asset and to the business's accounting practice.
• Follow the applicable accounting standards and guidance on how impairment is to be carried out.

By carrying out impairment correctly, the company ensures that the balance sheet reflects the current value of its assets, which contributes to more accurate financial reports and a better basis for decisions by management and stakeholders.