What is an Impairment?

//What is an Impairment?
What is an Impairment? 2017-10-05T02:00:30+00:00

Definition: An impairment, in accounting, is a loss of value of an intangible asset like a copyright or patent that should be reflected on future financial statements in the form of an impairment loss.

What Does Impairment Mean?

Most intangible assets like goodwill or patents are amortized over their estimated useful lives. Most of the time an intangible asset’s useful life is defined legally, but not always. Some patents legally expire after 20 years. These patents would obviously amortized over 20 years. Other intangible assets like copyrights are good for the lifetime of the author plus 70 years. These copyrights would be amortized over a much longer period of time.

Example

Some copyrights and other intangible assets don’t have a legal or theoretical expiration date. Take the Mickey Mouse copyrights. The Walt Disney Corporation has successfully renewed these copyrights several times in wake of an expiration date, as it will continue to do in the future.

Technically, these intangible assets have an expiration date, but since it will be renewed indefinitely, there is no real expiration date. This type of intangible asset is not amortized because there is no definite useful life. It will continue to live on forever.

Indefinite life assets are tested on an annual basis for impairment instead of being amortized. This means that the company looks at whether the asset has substantially lost value in the last year. If it has, the impairment loss is record and reported on the financial statements. All intangible assets are reported on the balance sheet usually below the fixed assets.