Updated for the 2026-2027 CFA® Level I curriculum.
Impairment and derecognition both reduce the carrying amount of a long-lived asset, but they happen for different reasons and hit the financial statements differently. Impairment recognizes that an asset's value has dropped below its book value while the company still holds it. Derecognition removes the asset entirely, usually through a sale, exchange, or abandonment. CFA Level I tests whether you can calculate the loss in each case and explain how it changes net income, equity, and key ratios.
Quick Answer
Impairment of assets occurs when an asset's carrying amount exceeds its recoverable value, forcing a write-down through the income statement. The impairment loss formula compares carrying amount to recoverable amount (IFRS) or to fair value after a recoverability test (US GAAP). Derecognition removes an asset from the books and recognizes a gain or loss equal to sale proceeds minus carrying amount. IFRS allows some impairment reversals; US GAAP generally does not.
Key Takeaways
Impairment reduces carrying amount when an asset's value has fallen below a threshold set by accounting standards.
IFRS uses a one-step test: compare carrying amount to recoverable amount, the higher of fair value less costs to sell and value in use.
US GAAP uses a two-step test: first check recoverability using undiscounted cash flows, then measure the loss using fair value.
IFRS permits impairment loss reversals (up to the original carrying amount net of depreciation); US GAAP does not for assets held for use.
The revaluation model under IFRS adjusts carrying amount to fair value and routes increases through other comprehensive income, not net income.
Derecognition triggers a gain or loss equal to the difference between proceeds received and the asset's carrying amount at disposal.
What You Need to Know for CFA Level I
The LOS asks you to explain and evaluate, so expect both calculation questions and interpretation questions about financial statement effects.
You must know the impairment test differences between IFRS and US GAAP, including when reversals are allowed.
You must be able to calculate an impairment loss and a gain or loss on derecognition from given figures.
Keep this page separate from intangible asset classification (prior note) and from disclosure-based ratio analysis (next note). This page owns the mechanics of impairment and derecognition only.
The most common trap is applying IFRS reversal rules or the one-step test to a US GAAP scenario, or vice versa.
What Is Impairment of Long-Lived Assets?
Impairment happens when the carrying amount of PPE or an intangible asset is no longer supported by the economic benefits the asset can generate. Companies test for impairment when indicators suggest a decline in value, such as falling market prices, obsolescence, or reduced expected cash flows. The loss is recognized on the income statement, which lowers net income and lowers the asset's carrying amount on the balance sheet.
Impairment is different from depreciation. Depreciation allocates the cost of an asset over its useful life based on a predictable pattern of use. Impairment is an unplanned write-down triggered by a drop in recoverable value. Depreciation happens every period, regardless of performance. Impairment happens only when indicators point to a loss in value.
How the Impairment Test Works
IFRS Impairment Test
IFRS uses a single-step test. If indicators of impairment exist, the company compares the asset's carrying amount to its recoverable amount.
Impairment Loss = Carrying Amount - Recoverable Amount
Recoverable Amount = max(Fair Value - Costs to Sell, Value in Use)
where:
Carrying amount: the asset's book value before the test,
Fair value less costs to sell: what the company could get from selling the asset today, net of selling costs, and
Value in use: the present value of future cash flows the asset is expected to generate.
If carrying amount exceeds recoverable amount, the difference is the impairment loss. If recoverable amount exceeds carrying amount, no loss is recorded.
US GAAP Impairment Test
US GAAP uses this two-step process for held-for-use PPE and finite-life intangible assets. Indefinite-life intangibles and goodwill have different tests.
Step 1: Recoverability test.
Compare carrying amount to the sum of undiscounted expected future cash flows. If carrying amount is less than or equal to undiscounted cash flows, the asset is not impaired and no further steps are needed.
Step 2: Measurement.
If carrying amount exceeds undiscounted cash flows, the asset is impaired. The loss equals carrying amount minus fair value.
Impairment Loss (US GAAP) = Carrying Amount - Fair Value
A held-for-use asset can pass the undiscounted recoverability test even when fair value is below carrying amount. In that case no impairment loss is measured under this US GAAP model. IFRS skips this intermediate step.
Reversing an Impairment Loss
IFRS allows reversal of an impairment loss if the recoverable amount increases in a later period. The reversal is capped at the carrying amount the asset would have had, net of depreciation, if no impairment had occurred. The reversal is recognized in net income.
US GAAP does not allow reversal of impairment losses on assets held for use. Once written down, the new carrying amount becomes the new cost basis. Assets held for sale are the exception under US GAAP; those can have impairment losses reversed up to the original carrying amount.
The Revaluation Model (IFRS Only)
IFRS permits two measurement models after initial recognition: the cost model and the revaluation model. US GAAP only permits the cost model. Under the revaluation model, an asset is carried at fair value at the revaluation date, less subsequent depreciation.
A revaluation increase normally enters OCI as a revaluation surplus, except to the extent it reverses a previous decrease for the same asset recognized in profit or loss. If fair value decreases below carrying amount, the decrease is recognized in net income as an expense, unless it reverses a prior revaluation surplus for the same asset, in which case it reduces that surplus first.
This is a key distinction from impairment. For a revalued IFRS asset, an impairment can reduce the related revaluation surplus through OCI before any excess is recognized in profit or loss. Revaluation decreases only hit net income after any existing surplus for that asset is used up.
Derecognition of PPE and Intangible Assets
Derecognition removes an asset from the balance sheet, typically through sale, abandonment, or exchange for another asset.
Derecognition Through Sale
When an asset is sold, the company compares sale proceeds to the carrying amount at the disposal date.
Gain or Loss on Sale = Sale Proceeds - Carrying Amount at Disposal
The gain or loss is reported in net income in the period of sale. The carrying amount used is the book value after all depreciation and any prior impairment up to the disposal date, not the original cost.
Derecognition Through Abandonment or Exchange
When an asset is abandoned, the company recognizes a loss equal to the asset's remaining carrying amount, since no proceeds are received. When an asset is exchanged for another asset, the company generally measures the transaction at the fair value of the asset given up or received, whichever is more clearly determinable, and recognizes any resulting gain or loss.
Effects on Financial Statements and Ratios
Impairment losses reduce net income, retained earnings, and total assets in the period recognized. Lower assets can improve asset turnover ratios going forward, even though the company has not become more efficient. Return on assets can rise in later periods simply because the asset base shrank.
Derecognition gains or losses are typically one-time items. Analysts often adjust them out when forecasting sustainable earnings, since a gain on sale does not reflect ongoing operating performance.
Working Example
On January 1, Year 1, a logistics company holds a sorting machine with a carrying amount of $500,000. The company reports under IFRS using the cost model. Ignore income taxes. Due to a drop in shipping demand, management tests the machine for impairment. Fair value less costs to sell is $420,000. Value in use, based on discounted future cash flows, is $450,000.
Step 1: Determine recoverable amount.
Recoverable amount = max($420,000, $450,000) = $450,000.
Step 2: Calculate impairment loss.
Impairment loss = $500,000 - $450,000 = $50,000.
The company writes the machine down to $450,000 and recognizes a $50,000 loss in net income.
Two years later: After depreciation, the machine's carrying amount is $380,000. The company sells it for $410,000.
Gain on sale = $410,000 - $380,000 = $30,000
The impairment loss in Year 1 reduced net income by $50,000 because the machine's value had genuinely declined. The $30,000 gain in Year 3 reflects a later increase in value realized through sale, a disposal gain measured against the carrying amount at sale. Assess any required impairment reversal before disposal separately; the sale entry itself removes the asset. An analyst would treat both the impairment loss and the gain on sale as non-operating items when assessing the company's core earning power.
The Same Asset Can Produce Different Impairment Results
Consider a separate held-for-use machine with a carrying amount of $500,000. Its undiscounted future cash flows are $540,000, value in use is $450,000, and fair value less selling costs is $420,000. Assume the relevant testing level is the same for this simplified comparison.
Under IFRS, recoverable amount is $450,000, so the cost-model impairment loss is $50,000. Under the US GAAP held-for-use model, the machine passes the initial recoverability test because $540,000 exceeds $500,000. No impairment is recorded under that test, despite the lower discounted value.
This difference comes from the measurement framework, not a different physical machine. An analyst should check impairment policy before attributing differing asset values or later ROA to operating efficiency.
Calculate the Reversal Ceiling After Depreciation
In a separate IFRS cost-model example, an asset is impaired from $500,000 to $400,000 when five years of useful life remain. Assume straight-line depreciation, zero residual value, and no other changes.
After one year, its carrying amount is $320,000. Without impairment, it would have been $400,000. If recoverable amount now rises to $450,000, the reversal is capped at $80,000:
Maximum reversal = $400,000 - $320,000 = $80,000
The restored carrying amount is $400,000, not $450,000 and not the original $500,000. Future depreciation is then based on that restored amount over the remaining four years.
Common Exam Traps
Using the lower value instead of the higher value for recoverable amount
IFRS recoverable amount is the higher of fair value less costs to sell and value in use. Candidates sometimes default to the lower figure out of habit from conservatism-based rules elsewhere in the curriculum.
Applying IFRS reversal rules to a US GAAP question
IFRS allows reversals for assets held for use. US GAAP does not. Watch for the standard named in the question stem before deciding whether a reversal is allowed.
Skipping the US GAAP recoverability test
Some candidates jump straight to comparing carrying amount with fair value. Under US GAAP, you must first confirm that carrying amount exceeds undiscounted cash flows before measuring the loss with fair value.
Confusing revaluation surplus with impairment loss
A revaluation increase goes to other comprehensive income. An impairment loss goes to net income. Mixing these up misstates the effect on earnings per share.
Using original cost instead of carrying amount at disposal
Gain or loss on sale is proceeds minus carrying amount at the disposal date, not minus the original purchase price.
Practice Question
On January 1, Year 5, an analyst reviews a manufacturing company's press machine reported under US GAAP. The machine's carrying amount is $800,000. Expected future undiscounted cash flows from the machine total $850,000. The machine's fair value is $720,000. What impairment loss, if any, should the company recognize?
$0, because undiscounted cash flows exceed carrying amount
$80,000, calculated as carrying amount minus fair value
$130,000, calculated as undiscounted cash flows minus fair value
Correct Answer: Option A
Explanation: Under US GAAP, the recoverability test compares carrying amount to undiscounted future cash flows. Since $850,000 (undiscounted cash flows) exceeds $800,000 (carrying amount), the asset passes the recoverability test. No impairment loss is recognized, and the measurement step using fair value is never reached.
Option B: This applies the fair value measurement step without first confirming the asset failed the recoverability test. It skips Step 1 of the US GAAP two-step process.
Option C: This combines the wrong two figures. Undiscounted cash flows are used only in the recoverability test, not in the loss calculation, and this answer never checks recoverability at all.
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FAQs About Impairment and Derecognition of PPE and Intangible Assets
What is the difference between impairment and depreciation?
Depreciation allocates an asset's cost over its useful life in a planned, predictable pattern. Impairment is an unplanned write-down that happens when the asset's recoverable value drops below its carrying amount due to specific indicators like obsolescence or falling demand.
What is the impairment loss formula?
Under IFRS, impairment loss equals carrying amount minus recoverable amount, where recoverable amount is the higher of fair value less costs to sell and value in use. Under US GAAP, after an asset fails the recoverability test, impairment loss equals carrying amount minus fair value.
How does the impairment test differ between IFRS and US GAAP?
IFRS uses one step: compare carrying amount directly to recoverable amount. US GAAP uses two steps: first test recoverability using undiscounted cash flows, then measure the loss using fair value only if the asset fails that first test.
Can a company reverse an impairment loss?
Under IFRS, yes, for most assets held for use, up to the carrying amount the asset would have had without the original impairment. Under US GAAP, no, impairment losses on assets held for use cannot be reversed.
How does derecognition affect the income statement?
Derecognition through sale produces a gain or loss equal to sale proceeds minus the asset's carrying amount at the disposal date. This gain or loss appears in net income in the period of sale and is often treated as non-operating by analysts.