Impairment
A reduction in the carrying value of an asset on the balance sheet when its recoverable amount falls below its book value.
What is Impairment?
An impairment charge is recorded when the carrying value (book value) of an asset — such as goodwill, property, or investments — exceeds its recoverable amount, which is the higher of its fair value less selling costs and its value in use. Under GAAP, goodwill and indefinite-lived intangibles must be tested for impairment at least annually; other long-lived assets are tested when triggering events occur. Impairment charges reduce net income and shareholders' equity but are non-cash, so they are often added back in adjusted earnings metrics. A large impairment write-down typically signals that an acquisition overpaid or that a business unit is underperforming.
Example
In FY2023, Microsoft recorded a $1.2 billion impairment charge on its investment in Cruise (autonomous vehicles), reflecting a significant decline in the business's expected value. The charge reduced GAAP earnings but had no cash impact in the quarter.
Source: Investopedia — Impairment