Asset impairment, revaluation, and depreciation all change what an asset is worth on the balance sheet, but they operate on different triggers and timelines. Depreciation runs on a fixed schedule, spreading an asset’s cost across the years it will be used. Impairment is reactive: it forces a write-down when something unexpected destroys value. Revaluation, available under IFRS but not U.S. GAAP, lets a company mark an asset up or down to its current market price. Knowing which mechanism applies — and when — is the difference between financial statements that reflect reality and ones that don’t.
How Depreciation Works
When a company buys equipment, it doesn’t expense the whole cost at purchase. Accounting standards require spreading that cost across the years the asset will generate revenue. Under IAS 16, the depreciable amount is the asset’s cost minus its residual value — what it will be worth at the end of its useful life. A $50,000 machine with a $5,000 residual value and a ten-year life produces a $4,500 annual depreciation expense under the straight-line method.1IFRS Foundation. IAS 16 Property, Plant and Equipment
Straight-line is the simplest approach but not the only one. The declining-balance method front-loads the expense, recognizing more in early years when the asset is newest. The units-of-production method ties depreciation to actual usage, which fits manufacturing equipment that might sit idle some months and run constantly in others. The chosen method should match how the asset delivers economic benefit, and it stays consistent unless circumstances genuinely change.
Each year’s charge flows to an accumulated depreciation account, steadily reducing the asset’s net book value. The process is mechanical and predictable. That is exactly the point. Depreciation handles the gradual, expected decline in value. It cannot handle a sudden crash, which is where impairment takes over.
How Asset Impairment Works
Impairment addresses the events depreciation cannot: the factory damaged by a flood, the patent made worthless by new regulations, the retail brand that lost half its customers. Under IAS 36, an asset is impaired when its carrying amount (what the books say it’s worth) exceeds its recoverable amount. The recoverable amount is the higher of two figures: what the asset could be sold for (fair value minus disposal costs) or the present value of the cash flows it will generate if kept (value in use).2IFRS Foundation. IAS 36 Impairment of Assets
If a company carries a patent at $1,000,000 and a regulatory change renders the underlying technology largely obsolete, the recoverable amount might drop to $200,000. The $800,000 gap hits the income statement immediately as a loss. There is no option to spread it over future periods or defer recognition. Once the write-down is recorded, the new lower carrying amount becomes the starting point for all future depreciation calculations.
Companies don’t test every asset every quarter by default. They watch for triggers: physical damage, adverse legal changes, a significant drop in market prices, evidence that an asset is underperforming projections, or a decline in the company’s market capitalization below net asset value. When any of these indicators appear, the affected assets must be tested.2IFRS Foundation. IAS 36 Impairment of Assets
Cash-Generating Units
Many assets don’t produce cash flows on their own. A single conveyor belt in a bottling plant has no independent revenue stream; it only generates cash as part of the entire production line. When an individual asset can’t be tested in isolation, IAS 36 requires grouping it into the smallest collection of assets that produces largely independent cash inflows, called a cash-generating unit (CGU). Impairment of a CGU is allocated first against any goodwill assigned to it, then proportionally across the remaining assets based on their carrying amounts. No individual asset within the CGU can be written down below the highest of its fair value minus disposal costs, its value in use, or zero.3IFRS Foundation. IAS 36 Impairment of Assets
Reversing an Impairment Loss
Under IFRS, impairment is not necessarily permanent. If the conditions that caused the write-down improve, IAS 36 allows reversal of the loss for any asset other than goodwill, provided the estimates used to calculate the recoverable amount have changed. There is a ceiling: the reversed amount cannot push the carrying value above where it would have been, net of depreciation, if no impairment had ever been recognized. Goodwill impairment is a one-way street: once written down, it stays written down.4IFRS Foundation. IAS 36 Impairment of Assets
How Revaluation Works
Depreciation only reduces book value. Impairment only reacts to bad news. The revaluation model under IAS 16 goes the other direction as well, allowing upward adjustments when market conditions improve. A company that bought commercial real estate for $2,000,000 might see it appreciate to $3,500,000 as the surrounding area develops. Under the revaluation model, the balance sheet can reflect that current figure rather than clinging to a purchase price that no longer represents economic reality.1IFRS Foundation. IAS 16 Property, Plant and Equipment
The accounting for revaluation gains is conservative. An upward revaluation doesn’t flow through the income statement as profit. Instead, the $1,500,000 increase goes into a revaluation surplus account within equity, visible to investors but not inflating reported earnings. If a later downward revaluation occurs, it first draws down that surplus. Only if the decrease exceeds the accumulated surplus does the remainder hit profit or loss.
Choosing the revaluation model is not a per-asset decision. A company must apply it to an entire class of property, plant, and equipment: all buildings, or all machinery, not cherry-picked individual items. The required frequency depends on how volatile the asset class is. Real estate in a rapidly developing market might need annual revaluation, while stable industrial equipment could go three to five years between updates as long as the carrying amount doesn’t drift materially from fair value.5IFRS Foundation. IAS 16 Property, Plant and Equipment Companies typically hire independent appraisers for these valuations.
A revaluation increase also creates a deferred tax liability. The asset is now worth more on the books, meaning a larger taxable gain when eventually sold, and that future obligation must be recognized alongside the surplus.
Where U.S. GAAP and IFRS Diverge
The most consequential split between U.S. GAAP and IFRS is that U.S. GAAP does not permit upward revaluation of property, plant, and equipment. Under ASC 360, assets stay at historical cost minus accumulated depreciation and any impairment write-downs. There is no mechanism to mark a building up to market value. Companies reporting under GAAP that own appreciated real estate carry it at a number that may bear no resemblance to current prices.
Impairment testing also differs structurally. Under IFRS, the test compares carrying amount directly to recoverable amount in one step. Under U.S. GAAP, long-lived assets go through two steps. First, the company compares the asset’s undiscounted expected future cash flows to its carrying amount. If cash flows exceed carrying amount, the asset passes and no impairment is recorded, even if fair value is lower. Only if the asset fails that screening does the company measure impairment by comparing fair value to carrying amount. The use of undiscounted cash flows in the first step means some assets that would be impaired under IFRS escape impairment under GAAP.
Reversal rules are equally stark. IFRS allows reversals for assets other than goodwill when conditions improve. U.S. GAAP prohibits reversal entirely. Once a long-lived asset is written down under ASC 360, the reduced carrying amount becomes its permanent new cost basis, even if the asset fully recovers.
Goodwill and Indefinite-Lived Intangibles
Goodwill and intangible assets with indefinite useful lives follow their own rules because they are not depreciated on a schedule. Under U.S. GAAP (ASC 350), goodwill must be tested for impairment at least once a year.6Financial Accounting Standards Board. Goodwill Impairment Testing A company can start with an optional qualitative screen, asking whether it’s more likely than not (greater than 50 percent probability) that a reporting unit’s fair value has fallen below its carrying amount. If not, no further testing is needed. If yes, the company proceeds to a quantitative comparison, and any shortfall up to the carrying amount of goodwill is recorded as an impairment loss.
Indefinite-lived intangibles — brand names, broadcast licenses, and similar assets that don’t expire — follow a parallel framework with the same annual requirement and optional qualitative screen. Interim testing becomes necessary when events like increased competition, regulatory changes, loss of key customers, or deteriorating economic conditions suggest a decline in value.
Under IFRS, goodwill is not tested in isolation. It must be allocated to the CGUs expected to benefit from the business combination that created it, and those CGUs are tested for impairment annually. Goodwill impairment can never be reversed under either framework.
Book Treatment vs. Tax Treatment
A book impairment loss and a tax deduction are not the same thing. Under 26 U.S.C. § 165, a taxpayer can deduct a loss only when it is actually “sustained” during the tax year and not compensated by insurance.7Office of the Law Revision Counsel. 26 U.S. Code 165 – Losses The tax code does not use the term “impairment” at all. A decline in value written down on the financial statements doesn’t qualify for a tax deduction until the loss is realized through a sale, exchange, abandonment, or the asset becoming completely worthless.
For individual taxpayers, the rules are tighter. Deductible losses are limited to those arising from a trade or business, from a transaction entered into for profit, or from specific casualties like fire or theft. A security that becomes worthless during the year is treated as a capital loss on the last day of that year.
A company that records a $500,000 impairment loss on its financial statements but cannot deduct it for tax purposes until the asset is sold will carry a deferred tax asset — the tax benefit it expects to realize in a future period.
Depreciation itself follows different rules on the tax side. For U.S. tax purposes, the IRS mandates the Modified Accelerated Cost Recovery System (MACRS) rather than the methods used in financial reporting. MACRS assigns every type of business property to a specific recovery period: automobiles and light trucks fall into the 5-year class, office furniture into 7 years, residential rental buildings into 27.5 years, and commercial buildings into 39 years.8Internal Revenue Service. Publication 946 – How To Depreciate Property
Two accelerated options change the math for 2026. The One, Big, Beautiful Bill Act, signed into law on July 4, 2025, restored 100 percent bonus depreciation for qualifying business property acquired after January 19, 2025.9Internal Revenue Service. One, Big, Beautiful Bill Provisions A company placing qualifying equipment in service during 2026 can deduct the entire cost in the first year rather than spreading it across MACRS recovery periods. Separately, the Section 179 deduction allows businesses to expense up to $2,560,000 of qualifying property for tax years beginning in 2026, with the deduction phasing out dollar-for-dollar once total property placed in service exceeds $4,090,000.8Internal Revenue Service. Publication 946 – How To Depreciate Property
Because bonus depreciation and Section 179 are tax rules, not financial reporting rules, a company might depreciate an asset over ten years on its IFRS or GAAP financial statements while deducting the full cost in year one on its tax return. That gap creates a deferred tax liability: the company pays less tax now but will pay more later as book depreciation continues without a corresponding tax deduction.
A Boundary: Assets Held for Sale
Impairment and revaluation both assume the asset is still in use. When a company decides to sell an asset instead of continue using it, different rules apply. Under IFRS 5, a non-current asset classified as held for sale is measured at the lower of its carrying amount or fair value minus selling costs.10IFRS Foundation. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations The value-in-use option that exists in regular impairment testing goes away because the company is no longer planning to extract cash flows from operations. Depreciation stops entirely the moment an asset is reclassified as held for sale, and if the sale falls through, the asset returns to the books at the lower of its pre-classification carrying amount (adjusted for the depreciation that would have been charged) or its recoverable amount at the date the decision was reversed.