Key takeaways
- IAS 36 ensures assets are not carried above their recoverable amount — the higher of fair value less costs of disposal and value in use.
- Look for impairment indicators at every reporting date; goodwill and indefinite-life intangibles must be tested at least annually.
- Where an asset does not generate independent cash flows, test it within its cash-generating unit (CGU).
- An impairment loss is allocated first to goodwill, then pro rata to other assets; impairment of goodwill is never reversed.
The balance sheet should not show assets at more than they can recover through use or sale. IAS 36 Impairment of Assets enforces this for property, plant and equipment, right-of-use assets, intangible assets, goodwill and investments in subsidiaries, associates and joint ventures (in separate financial statements). Inventories, financial assets, deferred tax assets and some others are covered by their own standards.
Impairment testing tends to matter most when business conditions deteriorate — a key customer is lost, an order book shrinks, costs rise or interest rates increase. These are exactly the times when management is under pressure to avoid write-downs, which is why IAS 36 requires a disciplined, documented process.
1. When to test: impairment indicators
At each reporting date, an entity assesses whether there is any indication that an asset may be impaired. If there is, it estimates the recoverable amount. Indicators include:
| External indicators | Internal indicators |
|---|---|
| Significant decline in an asset’s market value | Evidence of obsolescence or physical damage |
| Adverse changes in technology, market, economy or law | Asset idle, part of a restructuring or planned early disposal |
| Increases in market interest rates that raise discount rates | Economic performance worse than expected (budgets vs actual) |
| Net assets of the entity exceed its market capitalisation | Cash flows for operating or maintaining the asset much higher than budgeted |
Regardless of indicators, goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use must be tested at least annually.
2. Recoverable amount
Impairment loss = Carrying amount − Recoverable amount (if positive)
Fair value less costs of disposal (FVLCD) is the price that would be received to sell the asset in an orderly market transaction, less incremental disposal costs, measured under IFRS 13. Value in use (VIU) is the present value of future cash flows expected from continuing use and eventual disposal. If either measure exceeds the carrying amount, the asset is not impaired and the other need not be calculated.
3. Cash-generating units
Most individual assets — a sewing machine, a dyeing vat, a warehouse — do not generate cash inflows independently. They are tested as part of the smallest group of assets that generates largely independent cash inflows: the cash-generating unit. A CGU might be a factory, a product line or a retail store. Goodwill is allocated to the CGU or group of CGUs expected to benefit from the business combination, and corporate assets (head office, shared IT) are allocated on a reasonable and consistent basis.
4. Calculating value in use
Value in use cash flows should be based on reasonable and supportable assumptions, the most recent budgets or forecasts approved by management (normally covering a maximum of five years unless a longer period can be justified), and the asset in its current condition. They exclude cash flows from future restructurings not yet committed, from enhancing the asset’s performance, from financing activities and from income taxes. The discount rate is a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the asset.
In our illustrative example, a CGU (a production unit) has a carrying amount of BDT 40 million: goodwill BDT 4m, PPE BDT 30m and intangibles BDT 6m. Following the loss of a major customer, management forecasts net cash flows over the remaining six-year life of BDT 9.0m, 9.0m, 8.5m, 8.0m, 7.5m and 7.0m. Using a pre-tax discount rate of 12%, value in use is BDT 34.1 million. A market-based estimate of FVLCD is BDT 30 million.
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Impairment test for a cash-generating unit (illustrative, BDT million)
View the data behind this chart
| Category | BDT million |
|---|---|
| Carrying amount | 40.0 |
| Fair value less costs of disposal | 30.0 |
| Value in use | 34.1 |
| Year | Cash flow (BDT m) | Discount factor at 12% | Present value (BDT m) |
|---|---|---|---|
| 1 | 9.0 | 0.8929 | 8.04 |
| 2 | 9.0 | 0.7972 | 7.17 |
| 3 | 8.5 | 0.7118 | 6.05 |
| 4 | 8.0 | 0.6355 | 5.08 |
| 5 | 7.5 | 0.5674 | 4.26 |
| 6 | 7.0 | 0.5066 | 3.55 |
| Total | 49.0 | 34.15 |
5. Allocating the impairment loss
An impairment loss for a CGU is allocated first to reduce the carrying amount of any goodwill, and then to the other assets of the unit pro rata on the basis of their carrying amounts. No asset is reduced below the highest of its FVLCD, its value in use (if determinable) and zero.
| Asset | Carrying amount | Impairment allocated | Revised carrying amount |
|---|---|---|---|
| Goodwill | 4.0 | 4.0 | 0.0 |
| Property, plant and equipment | 30.0 | 1.54 | 28.46 |
| Other intangible assets | 6.0 | 0.31 | 5.69 |
| Total | 40.0 | 5.85 | 34.15 |
All figures are illustrative and rounded. Real impairment tests require documented assumptions, sensitivity analysis and, often, external valuation input.
The loss is recognised in profit or loss (or against a revaluation surplus for revalued assets). Depreciation of the remaining assets is then based on their revised carrying amounts over their remaining useful lives.
6. Reversals
At each reporting date, the entity assesses whether there is an indication that a previously recognised impairment loss (other than for goodwill) may no longer exist or may have decreased. A reversal is limited to the carrying amount that would have been determined, net of depreciation, had no impairment been recognised. Impairment losses on goodwill are never reversed.
7. Disclosures and audit focus
Entities disclose impairment losses and reversals by class of asset and segment, the events that led to them, the recoverable amount basis, and — for CGUs containing goodwill or indefinite-life intangibles — key assumptions, the period of projections, growth rates, discount rates and sensitivity to reasonably possible changes. Auditors focus on whether forecasts are consistent with past performance, whether discount rates reflect current market conditions and whether cash flows wrongly include benefits from future restructuring or capital improvements.
8. Practical tips
- Run a formal indicator checklist at every year-end and half-year, and keep evidence.
- Reconcile VIU cash flows to the approved budget and explain differences.
- Compare past forecasts with actual results to test forecasting reliability.
- Perform sensitivity analysis on the discount rate, growth and margin assumptions.
- Remember right-of-use assets under IFRS 16 are included in CGU carrying amounts.
Standards referenced in this article
IAS and IFRS are one body of standards — IFRS Accounting Standards, issued by the IASB. Standards issued before 2001 keep their IAS numbers and remain fully in force unless replaced. See the full IFRS & IAS standards list for every number and replacement.
| Standard | Title | Status | IFRS # & IAS # link |
|---|---|---|---|
| IFRS 13 | Fair Value Measurement | In force | — |
| IFRS 16 | Leases | In force (2019) | Replaced IAS 17 |
| IAS 36 | Impairment of Assets | In force | No IFRS number — IAS 36 is the IFRS standard |
Frequently asked questions
What is the recoverable amount under IAS 36?
The higher of an asset's (or cash-generating unit's) fair value less costs of disposal and its value in use. If the carrying amount exceeds the recoverable amount, the difference is an impairment loss.
How often must goodwill be tested for impairment?
At least annually, at the same time each year, and also whenever there is an indication that the cash-generating unit to which it is allocated may be impaired.
Can an impairment loss be reversed?
Yes, for assets other than goodwill, when the recoverable amount increases due to a change in estimates. The reversal is limited to the carrying amount that would have existed, net of depreciation, had no impairment been recognised. Goodwill impairment is never reversed.
Conclusion
IAS 36 keeps balance sheets honest when business conditions change. Assess indicators at every reporting date, test goodwill annually, define cash-generating units carefully, build value-in-use forecasts from approved budgets with a market-based discount rate, and allocate losses in the required order. Well-documented tests protect both the credibility of the accounts and management’s judgement.
Written by Liakat Hossain
Finance and accounts professional with experience in FP&A, SAP FICO, Power BI, internal control, reporting, audit, tax, VAT and export-oriented business operations.
This article is original educational content based on professional finance practice. Real-project examples are anonymized, and scenario figures are identified as model outputs rather than guaranteed results.