impairment business definition

1. In accounting, the situation that exists when the carrying value of a long-term asset or asset group is larger than fair market value.
2. Reduction in a firm's capital as a result of distributions or losses.

Case Study Ohio-based hamburger chain Wendy's International purchased fast-casual restaurant chain Baja Fresh Mexican Grill for $275 million in 2002. Shortly thereafter, Wendy's acquired two additional restaurant chains, Café Express and Pasta Pomodoro. Baja Fresh failed to meet Wendy's expectations and, despite several new CEOs, experienced a decrease in same-store sales of 4.6% in 2003, 6.3% in 2004 and 3.7% in 2005. At the same time, the new developing-brands division, of which Baja Fresh was the major component, suffered operating losses of over $60 million during 2004 and 2005. Wendy's bit the bullet in 2006, taking a $122.5 million pretax impairment charge (writing down goodwill that resulted from buying the Mexican-food chain for more than book value) related to Baja Fresh and selling the chain to private investors for $31 million, $244 million less than it had paid four years earlier. The prior year Wendy's had taken a $25 million impairment charge for its Tim Hortons doughnut chain, which it had spun off to its own shareholders.