What indicates an internal impairment in an asset?

An internal impairment in an asset is primarily indicated by adverse changes in how that asset is utilized within the business. When an asset is no longer being used effectively or its performance has diminished due to internal factors—such as reduced production capacity, technological obsolescence, or operational inefficiencies—it signifies that the asset's recoverable amount may have declined. This can result in the need to recognize an impairment loss, reflecting that the carrying value of the asset may not be recoverable based on its future cash flows or fair value.

In contrast, changes in the economic environment, while potentially relevant to impairment testing, are considered external factors and thus represent external impairments rather than internal ones. An increase in market capitalization typically indicates overall growth or value increase in a company but does not directly assess asset impairment. Similarly, significant declines in inflation rates may affect the financial environment, but they do not specifically relate to the internal functionality or effectiveness of a given asset.