The term "impairment" is often used to diplomatically describe any defect or limitation. For instance, a person who is blind may be referred to as visually impaired, while someone who is deaf may be termed hearing impaired. Similarly, in the context of Property, Plant, and Equipment (PPE), defects can be categorized as either physical or financial.
Physical defects in PPE are relatively straightforward to grasp, as they involve tangible issues with the equipment. However, understanding financial defects can be more challenging. For instance, when a car manufacturer releases an advanced version of a car, it can significantly diminish the value of earlier models, leading to a decline in resale value despite no operational deficiencies. This decrease in value is what accounting standards like Generally Accepted Accounting Principles (GAAP) term the "recoverable amount."
In US GAAP recoverable amount is termed as "fair value." While both GAAP and IFRS/Ind AS aim to identify impairment loss, there are notable differences in the process. Nevertheless, the fundamental objective remains consistent: to accurately assess and account for impairments in assets.
