What does the term impairment refer to regarding assets?

The term impairment refers to a permanent reduction in asset value. When an asset is deemed impaired, it means that its carrying amount on the balance sheet exceeds its recoverable amount, which is the higher of its fair value less costs to sell or its value in use. This situation typically arises when market conditions change, or the asset is no longer expected to generate cash flows that justify its carrying value.

Recognizing an impairment loss is important for accurate financial reporting, as it ensures that the financial statements reflect the true economic value of the assets. This process helps avoid overstating asset values, which could mislead stakeholders about the financial health of the organization.

In the context of the other options, while a temporary decline in market value might affect decision-making or indicate future impairment, it does not constitute impairment itself. Similarly, a decrease in cash flow from an asset does not automatically mean the asset is impaired; it’s possible for cash flows to decline without an impairment being necessary. Finally, a potential increase in asset value contradicts the concept of impairment, since impairment specifically deals with a reduction in value.