Impairment occurs when the carrying value of an asset exceeds its fair value. Organizations periodically compare an asset’s carrying value with its recoverable or fair value. If the carrying value is higher and the decline is significant and expected to be permanent, the organization must reduce the asset’s value.

The entity recognizes an impairment loss equal to the difference between the carrying value and the fair value. This adjustment ensures the asset is not overstated in the financial statements.