What’s an impaired asset? Accounting and business impact explained

The goal of investing is to see the value of your portfolio rise – but that’s easier said than done. From macroeconomic shocks to unexpected developments that trigger investor sell-offs, there’s no shortage of ways a once-promising asset can quickly lose value.

This is especially true in crypto, an asset class known for its volatility and regularly sees a 70–90% decrease in total market capitalization. A loss in value leaves many investors wondering how to handle these impaired assets from an accounting standpoint – specifically, whether they need to write them down to their carrying value and what that means for financial reporting. 

In this guide, we’ll explain what impairment accounting is and how to account for, value, and manage impaired cryptocurrency assets when preparing your financial statements.

What’s an impaired asset?

Generally speaking, an impaired asset is any asset purchased by an individual or company – including equipment, real estate, patents, stock, or crypto – that has lost value compared to its original purchase price. 

An impairment loss occurs when one of these assets experiences a substantial, unexpected, and permanent decline in recoverable value. 

While depreciation is common due to factors like new regulations, changes in market conditions, or advancing technology, impairment refers specifically to an unexpected loss of value that goes beyond the normal pace of depreciation. 

Under U.S. Generally Accepted Accounting Principles (GAAP) – a standardized framework for financial reporting used in the United States – entities, whether individuals or businesses, must identify impaired assets and report them as a loss on the income statement for the corresponding accounting period.

How to identify an impaired asset

There are various ways an asset can become impaired. Here are four common scenarios: 

• Decline in financial performance: If an asset can no longer generate economic benefits, it may qualify as impaired.  
• Shifting market conditions: Sudden changes in the market can lead to sharp declines in an asset’s value that are unlikely to be recovered. 
• Physical asset damage: If an asset suffers physical damage – such as from a fire – that significantly reduces its ability to generate economic value, it’s likely impaired. 
• Changes in regulations: New or updated regulations can also impact an asset's value. If that loss is considered unrecoverable, the asset may be deemed impaired.

Accounting standards for impaired assets

There are two common accounting standards that govern the process of identifying, measuring, and reporting impaired assets: 

U.S. Generally Accepted Accounting Principles (GAAP)

Under GAAP, the general definition of impairment is the inability to recover an asset's book value. 

Fair market value (FMV) provides the basis for valuing an asset. If the FMV falls significantly below the book value, the asset is likely impaired and can be written down – unless excluded under GAAP or other applicable accounting guidelines. 

Under this standard, impairment losses on assets held for use cannot be reversed, even if the asset’s value later increases. This typically refers to crypto assets used in day-to-day operations, like treasure holdings for payments, staking, or posted as collateral, rather than assets actively held for sale. 

However, assets classified as held for sale, which is rare for cryptocurrency, can be restored to their carrying amount prior to impairment. Under ASC 360 (Property, Plant, and Equipment), which governs long-lived assets, this treatment typically only applies if the crypto is part of a broader business operation being sold (e.g., crypto mining hardware). It’s more common under ASC 330 (Inventory) when crypto is held for resale by exchanges, brokers, market makers, or crypto funds, where entities may elect or be required to measure inventory at fair value less cost to sell (FVLCTS).

International Financial Reporting Standards (IFRS)

The rules for accounting for impaired assets under IFRS are outlined in IAS 36, which states that an asset must not be carried on an entity’s balance sheet at a value higher than its recoverable amount. 

If the carrying cost exceeds the recoverable amount, the asset is considered impaired. Its carrying amount must be reduced to its recoverable amount, and the difference is recorded as an impairment loss to accurately reflect the asset’s value on the balance sheet.

2025

Crypto Tax
Guide is here

CoinTracker's definitive guide to Bitcoin & crypto taxes provides everything you need to know to file your 2024 crypto taxes accurately.

Get startedLearn more

Accounting for asset impairment: Step-by-step process

There are five main steps to follow when conducting an impairment analysis: 

1. Assess impairment indicators

These include both external and internal factors that suggest an asset may not be recoverable: 

• External indicators: These refer to observable signs of a significant and unexpected decline in market value.
• Internal indicators: These may include internal documentation showing that the cost to hold or maintain the asset is higher than initially budgeted, a significant increase in expected losses, or negative cash flows associated with the asset. 

If any of these indicators are present, an impairment test will determine if the asset qualifies. 

2. Perform an impairment test

Under GAAP, impairment testing typically involves two steps: 

• Undiscounted cash flow test: Compare the sum of all undiscounted net cash flows the asset is expected to generate with its carrying value. If the carrying value is higher, this indicates impairment and warrants further testing.
• Fair value test: Determine the impairment expense by subtracting the asset’s fair value from its carrying value. 

Under IFRS, the process requires comparing the asset’s carrying value with its recoverable amount, which is the higher of its fair value less costs to sell or its value in use.

3. Measure impairment loss

Under GAAP, calculate the impairment loss formula by comparing the asset’s FMV to its book value on financial statements. If the FMV is lower, the difference represents the impairment loss. 

Under IFRS, the impairment loss is the difference between the asset’s carrying value and its recoverable amount. If the carrying value exceeds the recoverable amount, an impairment loss has occurred.

4. Record the impairment loss

If you’ve confirmed impairment, you must record the loss accordingly – again, unless excluded explicitly under applicable GAAP guidelines. 

The asset’s carrying value must be adjusted to its new FMV on the balance sheet, which affects both financial reporting and future depreciation calculations. Once you’ve determined the impairment loss amount, record it as an impairment expense on the income statement and reduce the asset’s carrying value on the balance sheet. 

5. Disclose in financial statements

After calculating and recording the impairment loss, you must disclose it in your financial statements to maintain transparency. 

Start by providing a description of the impaired asset and the reasons for the impairment. Then, report the impairment loss in your income statement's profit and loss (P/L) section.

How asset impairment impacts financial statements

There are three main impacts that asset impairment can have on financial statements: 

• Income statement: The impairment loss is recorded as an expense, which reduces net income. 
• Balance sheet: The asset’s value is reduced to its fair value, which lowers the value of total assets. 
• Cash flow statement: The impairment amount is added back to operating cash flows as a noncash expense. 

Track your crypto losses and gains with CoinTracker

The HODL nature of crypto has made many people millionaires – but it’s also led to significant losses that leave some assets impaired. Tracking these changes can be time-consuming, especially with data scattered across centralized and decentralized platforms (CEXs and DEXs). 

Whether you’re a long-term HODLer or an active trader, CoinTracker simplifies tracking and organizing your crypto activity. With CoinTracker’s Portfolio Tracker, you can connect APIs from your exchange accounts and crypto wallet addresses to create a comprehensive, real-time view of your transaction history. 

CoinTracker automatically compiles this data, helping you track gains, losses, and potential tax-loss harvesting opportunities. And when it’s time to file taxes, you can seamlessly import your transaction history into IRS-compliant forms for accurate reporting.

Start for free and discover why over 2 million cryptocurrency traders trust CoinTracker to optimize their taxes.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.