Chapter 08 · Finance, data & evidenceSustainable Finance & Investment
Asset impairment
Definition
An accounting adjustment that reduces the carrying amount of an asset to its recoverable amount when events or changes in circumstances indicate the carrying value may not be recoverable. Under IAS 36 (Impairment of Assets), companies must test assets for impairment and recognise losses in profit or loss.
References
IAS 36 application to climate/stranding; scenario analysis for cash-flow projections; sensitivity disclosures.
Stranded asset definition (unanticipated or premature write-downs); connectivity between IFRS S2 disclosures and impairment testing; overstatement risk.
Overview
What it means
Impairment is where sustainability risk becomes financially material: assets likely to lose value in the low-carbon transition — coal plants, fossil fuel reserves, emissions-intensive equipment — must be tested against adjusted cash-flow projections and useful lives.
IFRS guidance clarifies that climate-related risks should be reflected in financial statements when material, though recognition involves significant judgement under uncertainty.
How it is used
Companies run impairment tests using scenario analysis (for example NGFS climate scenarios) to explore plausible policy, technology and market outcomes, and disclose key assumptions and sensitivities. Auditors and regulators scrutinise whether climate assumptions in impairment tests are consistent with sustainability disclosures — a "connectivity" concern.
Why it matters
Impairment converts transition risk from narrative into numbers. Understated impairment assumptions can leave carbon-intensive assets overvalued on balance sheets — the accounting face of the stranded-asset problem — making impairment testing a focus of investor and regulatory attention.