Does Impairment Affect EBITDA? Clear Answer, Examples & Valuation Impact (2025)

No, impairment does not affect EBITDA because impairment is a non-cash expense excluded from EBITDA. However, impairment does affect EBIT, net profit, balance sheet values, and valuation multiples.

Impairment affects carrying amount, CGU performance, balance sheet strength, and future depreciation/amortization.

Companies must test impairment under IAS 36, especially if cash flows weaken or asset value drops.

In 2025, investors and lenders closely track EBITDA adjustments, impairment disclosures, and valuation inputs due to volatile markets.

Always perform a registered valuer–driven impairment valuation for compliance, audits, and due-diligence reviews.

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Companies often ask whether impairment affects EBITDA, mainly because stakeholders use EBITDA to judge operating performance, loan covenants, valuations, and deal decisions.
Yet the accounting treatment of impairment — and how it affects reported performance — is frequently misunderstood.

Impairment has become a critical discussion point for businesses, investors, and valuation professionals — especially in 2025, where even a small accounting adjustment can significantly alter key performance metrics like EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

While EBITDA is widely used to measure a company’s operational profitability, there’s still confusion around how impairment losses influence this figure and whether they should be considered in valuation analysis.

In this guide, RNC  break down the complete relationship between impairment and EBITDA, explain how these adjustments impact business valuation, and show how to calculate adjusted EBITDA in real-world scenarios. You’ll also learn from 2025-based case examples and expert insights on how valuation professionals interpret impairment while assessing company performance.

Learn more : Valuation under IBC (2025): Process, Challenges & Best Practices

Impairment vs Depreciation vs Amortization

Impairment, depreciation, and amortization are often confused, but they serve different purposes in financial reporting. Depreciation and amortization are systematic allocations of an asset’s cost over its useful life and are expected, recurring expenses. Impairment, on the other hand, is a one-time adjustment recognized when an asset’s recoverable value falls below its carrying amount due to events like market decline or obsolescence. While depreciation and amortization are planned charges, valuation impact reflects an unexpected loss in value. Importantly, all three affect EBIT and net profit, but impairment is usually excluded when calculating EBITDA and adjusted EBITDA.

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In financial reporting, impairment refers to a permanent reduction in the recoverable value of an asset — meaning the asset can no longer generate the same economic benefits it once did. This typically happens due to technological obsolescence, market decline, physical damage, or regulatory changes.

Under Ind AS 36 and IFRS 36, companies must perform impairment testing periodically to ensure that asset values recorded on the balance sheet reflect their true recoverable amounts. When the recoverable amount is less than the carrying amount, the difference is recognized as an impairment loss.

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Example:

A manufacturing company owns machinery worth ₹10 crore (book value). After an assessment, the recoverable value is estimated at ₹7 crore.
Impairment loss = ₹10 crore – ₹7 crore = ₹3 crore.

Why It Matters:

One of the most common questions investors ask is — “Does impairment affect EBITDA?”

Impairment does not directly affect cash flow because it is a non-cash accounting adjustment. When an impairment loss is recorded, no actual cash outflow occurs at that time. As a result, operating cash flows generally remain unchanged. However, impairment can have indirect cash flow implications in the long term. It may signal weaker future earnings, lower asset productivity, or reduced borrowing capacity. In valuation and financial analysis, impairment is therefore adjusted out of EBITDA but carefully considered when assessing sustainability of cash flows and future business performance.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company’s operating profitability. However, analysts often adjust EBITDA when valuing companies to present a clearer picture of recurring earnings.

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Impact of Impairment on Financial Metrics

Example:

Let’s say a company reports ₹100 crore in EBITDA and records an impairment loss of ₹15 crore on old assets.

• EBITDA remains ₹100 crore (impairment excluded).

• EBIT reduces to ₹85 crore, showing lower book profitability.

When investors assess valuation, they may add back impairment to get Adjusted EBITDA = ₹115 crore, reflecting true operating performance.

Impairment Impact on EV/EBITDA Multiple

Impairment can influence valuation through its impact on the EV/EBITDA multiple, even though EBITDA itself remains unaffected. Since enterprise value (EV) reflects market perception, a significant impairment may lead investors to reassess business fundamentals, growth prospects, or asset quality. This can result in a lower EV, thereby changing the EV/EBITDA multiple. Analysts often normalize EBITDA by excluding impairment but still factor the reason behind impairment into valuation assumptions. In 2025, valuation professionals increasingly analyze impairment events alongside qualitative risks rather than ignoring them entirely.

Learn more : valuation for insurance purposes importance and methodologies

Impairment Treatment under Ind AS vs IFRS

Under Ind AS 36 and IFRS 36, impairment principles are largely aligned. Both standards require entities to assess whether assets are carried above their recoverable amount, defined as the higher of value in use and fair value less costs of disposal. Impairment losses must be recognized immediately in the profit and loss statement. However, disclosure requirements and assumptions used in impairment testing may differ slightly.

For valuation and EBITDA analysis, impairment under both Ind AS and IFRS is treated as a non-cash, non-operating adjustment and is typically excluded from EBITDA calculations.

Key Accounting Guidelines

Valuation Adjustments Post-Impairment

When performing business or asset valuation, experts make normalization adjustments to remove the effects of non-recurring items such as impairment.
This process helps analysts arrive at Adjusted EBITDA or Normalized Earnings, which better reflect recurring profitability.

Normalization Process Example:

1. Start with reported EBITDA

2. Add back one-time impairment losses

3. Adjust for any extraordinary income or expenses

4. Calculate Adjusted EBITDA

5. Recompute valuation multiples (EV/EBITDA, P/E, etc.)

Impact on Valuation Metrics

Expert Tip:

“Impairment testing is not a red flag — it’s a recalibration. Analysts who normalize impairment correctly get a more accurate valuation picture.”
— RNC Certified Valuer, Business Advisory Division

Understanding impairment becomes clearer when we see how it plays out in real companies. Let’s look at a simplified 2025-based case that reflects how impairment influences EBITDA and overall valuation.

Case Example – Technology Manufacturing Company (FY 2024-25)

A listed technology manufacturer had significant R&D assets that became outdated due to rapid AI-driven innovations.
After impairment testing under Ind AS 36, the company recognized a ₹180 crore impairment loss on its intangible assets.

Interpretation:

• EBIT and Net Profit decline sharply, reflecting lower book profitability.

Valuation Outcome

After normalization, the Adjusted EBITDA increased from ₹400 crore to ₹580 crore, improving valuation consistency and avoiding distortion in EV/EBITDA multiples.
This demonstrates why professional valuers always separate recurring performance from one-time accounting events like impairment.

Read more : valuation and IBC insights

Impairment in IBC Valuation Cases

In IBC (Insolvency and Bankruptcy Code) valuation cases, impairment plays a critical role in understanding historical financial performance versus realizable value. Companies undergoing insolvency often record large impairment losses due to stressed assets or reduced recoverability. While these impairments do not impact EBITDA directly, they influence creditor confidence, liquidation value, and resolution planning. Valuers typically rely on adjusted EBITDA, removing impairment to assess operational viability, while separately analyzing impaired assets to estimate fair value. Proper interpretation of impairment is essential for fair and defensible IBC valuations.

Key Takeaways

• Normalizing impairment improves valuation accuracy.

• Continuous impairment testing ensures asset values remain realistic under IFRS 36 and Ind AS 36.

When valuing companies in 2025, analysts rarely rely on reported EBITDA. They calculate Adjusted EBITDA, which removes the effects of one-time or non-recurring accounting items such as impairment losses, restructuring costs, or exceptional income. This normalized figure represents the company’s true recurring earning power, forming the base for valuation multiples like EV/EBITDA.

Step-by-Step Process to Calculate Adjusted EBITDA

Formula

$$\text{Adjusted EBITDA}=\text{Reported EBITDA}+\text{Impairment Losses}\pm \text{Other Non-Recurring Items}$$

Example:
If a company reports ₹400 crore EBITDA and ₹180 crore impairment, its Adjusted EBITDA = ₹580 crore (400 + 180).
Analysts then use this normalized value for fair valuation comparisons.

Why Adjusted EBITDA Matters in 2025

• Removes accounting noise from impairment and other exceptional items.

• Improves comparability between companies and across years.

• Enhances investor confidence by showing sustainable earnings.

• Aligns with global valuation practices under IFRS and Ind AS.

“Normalized EBITDA is the most reliable base for enterprise valuation — impairment adjustments simply restore clarity.”
— RNC Certified Valuer, Financial Advisory Division

Expert Insights & 2025 Valuation Trends

In 2025, global valuation practices have become far more data-driven — integrating AI forecasting, ESG scoring, and predictive accounting models into traditional analysis. Yet, the core principle remains unchanged: valuation accuracy depends on separating operational performance from one-time accounting distortions such as impairment losses.

💬 Expert Insight from RNC Valuers

“Impairment doesn’t weaken a company — it simply corrects its balance sheet.
For a fair valuation, we always normalize EBITDA to exclude one-off impairments and reflect true recurring performance.”
— RNC Certified Valuer, Corporate Finance & Deals Division

Emerging Valuation Trends in 2025

In 2025, understanding the link between impairment and EBITDA is vital for investors, CFOs, and valuation professionals who want to interpret financial performance accurately. While impairment doesn’t directly reduce EBITDA—since it’s a non-cash accounting item—it can influence valuation perception, investor confidence, and enterprise value when left unadjusted.

The smartest approach is to use Adjusted EBITDA, which eliminates one-time impairments and other extraordinary items, giving a transparent view of recurring profitability. By normalizing impairment, businesses achieve more realistic valuation multiples and build stronger credibility with auditors and stakeholders.

At RNC Valuecon LLP, we combine Ind AS 36 and IFRS 36 compliance with real-world experience to deliver valuations that withstand audit and regulatory scrutiny.

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1. Does impairment affect EBITDA?

No, impairment does not directly affect EBITDA. EBITDA excludes impairment losses because impairment is a non-cash accounting adjustment. However, impairment impacts EBIT, net profit, asset values, and investor perception. For valuation purposes, analysts often adjust EBITDA by adding back one-time impairment losses to arrive at Adjusted EBITDA.

2. Is impairment a cash expense?

No, impairment is not a cash expense. It is a non-cash accounting entry recorded when an asset’s recoverable value falls below its carrying amount. Since no actual cash outflow occurs at the time of impairment, operating cash flows remain unchanged. However, impairment may indicate weaker future cash-generating ability.

3. How does impairment affect EV/EBITDA?

Impairment does not change EBITDA but can indirectly affect the EV/EBITDA multiple. Significant impairment may reduce enterprise value (EV) as investors reassess business fundamentals, asset quality, or growth prospects. Valuation professionals typically normalize EBITDA while factoring impairment reasons into enterprise value assumptions.

4. Is impairment testing mandatory under Ind AS 36?

Yes, impairment testing is mandatory under Ind AS 36 when there are indicators of asset value decline. Certain assets such as goodwill and intangible assets with indefinite useful lives must be tested annually, regardless of indicators. This ensures balance sheet values reflect recoverable amounts.

5.  How do valuers treat impairment in IBC cases?

In IBC valuation cases, valuers exclude impairment from EBITDA to assess operational viability using Adjusted EBITDA. However, impairment is critically analyzed when estimating liquidation value, fair value, and stressed asset recoverability. Proper treatment of impairment ensures fair and defensible insolvency valuations.