Question

Explain the difference between impairment and depreciation

Answer 1

Difference between Impairment and depreciation

1. Impairment loss is the amount by which carrying amount exceeds its recoverable amount whereas depreciation is systematic allocation of depreciable amount of an asset over its useful life.
2. There are different methods for calculating depreciation example Striaght line method , Diminishing balance method whereas impairment is the difference between carrying amount and recoverable amount (Recoverable amount is higher of fair value less cost to sell and its value in use recoverable amount).
3. Depreciation is applicable to property ,plant and equipment only whereas impairment has wider scope it applicable to other assets also like financial asset, Intangible assets ,investment in subsidairy,etc
4. Reversal of impairment loss is possible when it meets criteria, there is no such thing incase of depreciation.
5. Depreciation is reduction value of asset due to usage, wear and tear , obsolescence due technological changes whereas causes of impairment are much wider such as physical damages,changes in interest rate, decline in market value,etc.
6. Impairment computed after adjusting depreciation on respective asset.
7. Entity shall assess at the end of the each reporting period whether there is any indication that an asset may be impaired,whereas depreciation should be charged continously when asset ready for use or put in to use.