What indicates that an asset is impaired?

An asset is considered impaired when its carrying amount exceeds its recoverable amount. The recoverable amount is defined as the higher of an asset's fair value less costs to sell and its value in use. When the carrying amount surpasses this recoverable amount, it indicates that the asset is no longer worth what is reflected on the balance sheet and that its value has decreased. This condition leads to the necessity for an impairment loss to be recognized, reflecting a decrease in the asset's value on financial statements.

This concept is critical in ensuring the financial statements provide a true and fair view of an entity's financial position. Recognizing impairment helps stakeholders understand that the asset’s contribution to future cash flows may be less than previously estimated, which is an essential aspect of financial reporting and maintaining reliable financial information.