Impairment

Writing an asset down to what it is now worth, when its carrying amount is no longer recoverable. It applies to goodwill, plant, intangibles and investments alike.

A company carrying ₹650 crore of goodwill from an acquisition whose recoverable amount has fallen to ₹400 crore must take a ₹250 crore impairment charge. Profit falls by ₹250 crore; cash does not move at all, because the money left years ago when the acquisition was paid for.

The information content is in the timing and the size. Management chooses the assumptions in the recoverable-amount calculation, so an impairment usually arrives when the case for the old assumptions has become impossible to defend rather than when the business first deteriorated.

A large impairment is a company admitting that an earlier price was wrong. Read the original acquisition note next to it.