What does "impairment" mean in accounting?

Impairment in accounting refers to the situation where the carrying value of an asset exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. When an asset is impaired, it means that its market value has fallen below its book value, necessitating a reduction in the asset's carrying amount on the balance sheet. This process ensures that the financial statements accurately reflect the true value of the company's assets, aligning them more closely with their current market conditions.

In terms of financial reporting, recognizing impairment allows organizations to present healthier and more truthful financial results. When the market value of an asset drops significantly, it could indicate that the asset is no longer as valuable to the company as it once was, prompting the need for the impairment adjustment.

The other options do not align with the definition of impairment. Increasing an asset's value over time or recognizing losses only upon sale does not accurately capture the concept of impairment, nor does merely calculating an asset's fair market value. Impairment specifically addresses the need to adjust the carrying value of an asset downward when its value in operational context diminishes.