What is Impairment?

An impairment is an accounting principle that describes a permanent reduction in the value of a company's asset, typically a fixed asset or an intangible asset like goodwill. If an asset's fair market value has fallen below its carrying value on the balance sheet, the company must record an impairment expense.

For Startups: A common scenario for startups is the impairment of goodwill. If a startup acquires another company, it records goodwill. If the acquired company later underperforms significantly, the acquirer may have to take an impairment charge, which is a non-cash expense that reduces its reported profit.

Example: A company acquires a brand for ₹5 Crores. Two years later, due to market changes, the brand's value is assessed to be only ₹2 Crores. The company must record a ₹3 Crore impairment loss on its income statement.