Functional impairment is a key factor in the clinical importance of mental health problems in children. Yet, the nature of impairment and criteria for defining and assessing impairment in childhood disorders has been surprisingly overlooked in much of the literature. The current article examines the extant literature on the conceptualisation, nature and assessment of impairment in childhood disorders. Relations between diagnostic symptoms and functional impairment are discussed together with the influence of impairment on diagnostic decisions and prevalence rates. Several factors influencing impairment in childhood such as culture, development and gender are considered. This article concludes with a discussion of the utility of separating judgements of impairment from specific diagnoses, which is proposed for consideration in the forthcoming DSM-5.