IAS 36 Impairment of Assets: Summary, Practice Questions & Decision Tree

At each reporting date the entity looks for indicators of impairment (IAS 36.9, 12): external ones like a market value decline, adverse market or interest-rate changes, and a market capitalisation below net assets; internal ones like obsolescence, physical damage, restructuring plans and worse-than-expected performance. Only when an indicator exists is the full test performed — with three exceptions tested annually regardless of indicators (IAS 36.10): goodwill acquired in a business combination, intangible assets with indefinite useful lives, and intangibles not yet available for use.

Recoverable amount is the higher of fair value less costs of disposal (FVLCD) and value in use (IAS 36.18). FVLCD is the price in an orderly sale minus incremental disposal costs — legal fees, removal costs, transaction taxes. Value in use is the present value of the cash flows the entity expects to extract by using the asset and eventually disposing of it (IAS 36.30–31). If either number exceeds carrying amount, there is no impairment and the other need not be computed (IAS 36.19).

The logic of 'higher of' reflects rational behaviour: an asset is worth whichever route — selling it or keeping it — yields more, so the balance sheet cap sits at the better alternative.

Value in use is built from cash flow projections and a discount rate, and IAS 36 is prescriptive about both. Projections rest on reasonable and supportable assumptions and recent budgets covering at most five years, extrapolated afterwards with a steady or declining growth rate not exceeding the long-term rate for the market (IAS 36.33). The cash flows reflect the asset in its current condition — future restructurings the entity is not yet committed to and enhancement capex are excluded (IAS 36.44). Financing cash flows and tax are also excluded: the discount rate handles the time value of money, and it is a pre-tax rate reflecting the risks specific to the asset (IAS 36.50, 55).

Most assets don't earn cash alone — a machine in a production line earns nothing without the line. When independent cash inflows can't be identified for an asset, the test is performed for its cash-generating unit: the smallest group of assets generating cash inflows largely independent of other assets (IAS 36.66, 68). Goodwill can't generate cash flows at all, so it is allocated at acquisition to the CGUs expected to benefit from the combination's synergies — no higher than an operating segment (IAS 36.80) — and rides along in each CGU's annual test.

For a single asset, the impairment loss is simply carrying amount minus recoverable amount, charged to profit or loss (or against a revaluation surplus first, for revalued assets) (IAS 36.59–60). For a CGU the loss follows a strict order (IAS 36.104): goodwill allocated to the unit is written off first; any remainder is spread across the other assets pro-rata to their carrying amounts. Two floors protect individual assets: no asset is written below the higher of its own FVLCD, its value in use, or zero (IAS 36.105) — any blocked amount is reallocated to the remaining assets.

If the reasons for a past impairment reverse — demand recovers, the estimates improve — the loss is reversed, but only up to the carrying amount the asset would have had (net of depreciation) if it had never been impaired (IAS 36.114, 117). The reversal is income in profit or loss, or an OCI credit for revalued assets. The one permanent write-down: goodwill impairment is never reversed (IAS 36.124) — a later recovery is treated as internally generated goodwill, which IFRS does not recognise.