What Is an Impairment Charge?
An impairment charge is a type of accounting adjustment that has to do with making changes in the value of a company’s goodwill as it is cited in the accounting records. This type of adjustment can technically involve an increase or a decrease of company goodwill, although the impairment charge itself usually has do to with a reduction rather than an increase. The reason for applying this type of charge has to do with making sure the accounting records reflect a realistic balance between the worth of the assets held by the company and the overall financial value of the company itself.
In order to understand the charge, it is first necessary to understand what is meant by company goodwill. This simply has to do with the value of the company as opposed to the worth of its financial assets. Intangibles such as name brand recognition and reputation are examples of goodwill that can make a company worth more in the perceptions of consumers and investors than simply the monetary value of the assets held by the business. While this value must be accounted for in the company financial records, doing so can often require making adjustments to that goodwill evaluation, based on what is happening with the company in the marketplace.
Determining if any type of impairment has taken place is the first step to identifying if there is even the need to apply an impairment charge. Assuming the company’s reputation is not suffering in any way and consumer confidence remains within a certain range, the perception of value may not change. When this is the case, there is no need to apply the charge. Many companies interested in avoiding such a charge on an annual basis will go to great lengths when it comes to public relations as well as keeping the flow of revenue within acceptable levels.
One of the benefits of applying an impairment charge is that the process requires looking closely at the condition to determine if some factors have affected the company’s value. This investigation can often identify smaller issues before there is the chance for major damage to the business, allowing owners and managers to adjust the operation to neutralize those issues. From this perspective, assessing impairment and possibly having to apply an impairment charge during one operational year may in fact set the stage for taking actions that increase the company’s value during the next annual period.
A downside of the charge is that it does show up in the company’s accounting records, meaning investors will see the change. Depending on the severity of that change, some investors may choose to sell their holdings, a situation that could further damage the business and its operation. While the imposition of an impairment charge in and of itself does not mean the company is in any immediate danger of losing money or market share, it can be a matter that must be addressed with stockholders in order to prevent a turnover that further erodes the goodwill of the business.
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