An Impairment cost must be included under expenses when the carrying value of a non-current asset exceeds the recoverable amount. The Impairment cost is calculated as:
The carrying amount is defined as the value of the asset as displayed on the balance sheet. The recoverable amount is the higher of either the asset's future value for the company or the amount it can be sold for, minus any transaction costs.[1]
For example, a store that is recorded on the balance sheet as a non-current asset worth £20,000 will have a carrying amount of £20,000. However, the store owner finds that the market value of the shop falls to £12,000. Therefore an Impairment cost is calculated:
This is recorded as an expense of £8,000 in the profit and loss statement.[2]