IAS 36 STATES the concept of Impairment of Assets which states that an entity’s assets are NOT carried at more than their recoverable amount (i.e. the higher of fair value LESS costs of disposal and value in use).
Quick Reference Summary
Objective & Overview of IAS 36
IAS 36 Impairment of Assets is an International Financial Reporting Standard issued by the International Accounting Standards Board (IASB). Its primary objective is to ensure that an entity’s assets are never carried in the financial statements at more than their recoverable amount, the maximum economic benefit the entity can expect to derive from the asset through use or sale.
When the carrying amount of an asset exceeds what it can earn or be sold for, the asset is considered impaired. IAS 36 requires the entity to recognise an impairment loss, reducing the asset’s carrying amount to its recoverable amount immediately.
An entity must reduce the carrying amount of an asset to its recoverable amount the moment the carrying amount exceeds what the entity can recover, whether through continued use or through outright sale.
Beyond the mechanics of impairment testing, IAS 36 also prescribes rules for when and how to reverse a previously recognised impairment loss, how to handle impairment at the level of cash-generating units (CGUs), how to allocate goodwill from business combinations to those CGUs, and what disclosures are required in the financial statements.
Historical Development of IAS 36
Scope – What Does IAS 36 Apply To?
IAS 36 applies to all assets unless another standard already contains specific impairment requirements. This makes IAS 36 the default impairment standard across most non-financial, non-current assets on an entity’s balance sheet.
Assets Within Scope of IAS 36
Assets Excluded from IAS 36 Scope
- Inventories – governed by IAS 2
- Deferred tax assets – governed by IAS 12
- Contract assets – governed by IFRS 15
- Employee benefit assets – governed by IAS 19
- Financial assets – governed by IFRS 9
- Investment property at fair value (IAS 40)
- Biological assets at fair value (IAS 41)
- Non-current assets held for sale (IFRS 5)
Assets excluded from IAS 36 are not left without impairment protection. Each excluded category has equivalent impairment requirements embedded within its own standard, inventories are written down to net realisable value (IAS 2) and financial assets use the expected credit loss model (IFRS 9).
Identifying Indicators of Impairment
At the end of each reporting period, an entity must assess whether there is any indication that an asset may be impaired. If no indicators are present, no formal impairment test is required except for three categories that must be tested annually regardless:
(1) Goodwill acquired in a business combination (2) Intangible assets with indefinite useful lives (3) Intangible assets not yet available for use. These three categories carry the highest risk of undetected impairment and therefore require an annual test irrespective of any indicator.
For all other assets, impairment indicators must first be identified from both external and internal sources. The following list from IAS 36 is non-exhaustive, entities may identify other factors that indicate potential impairment:
Significant Market Value Decline
A decline in the asset’s market value that exceeds what would normally be expected from the passage of time or routine use during the period.
Adverse Environment Changes
Significant adverse changes in the technological, market, economic, or legal environment in which the entity operates or in which the asset is employed.
Increased Market Interest Rates
Market interest rates or other market returns on investments have increased materially, making it likely the discount rate used in VIU calculations will rise and reduce recoverable amount.
Carrying Amount Exceeds Market Cap
The entity’s net assets carrying amount exceeds its market capitalisation, a prominent signal that the market perceives lower asset values than those on the books.
Climate & Sustainability Changes
New emissions legislation, voluntary decarbonisation commitments, or shifts in customer preference toward sustainable alternatives that are expected to materially reduce a CGU’s future cash flows.
Obsolescence or Physical Damage
Evidence that an asset has become obsolete or has sustained physical damage, reducing its capacity to generate economic benefits.
Adverse Changes in Planned Use
Plans to discontinue, idle, or restructure the operation to which the asset belongs, or to dispose of an asset earlier than previously expected.
Worse-than-Expected Performance
Internal reporting indicates that actual cash flows or operating profits are significantly worse than budgeted, or forward-looking forecasts show material deterioration versus prior estimates.
Measuring Recoverable Amount
The recoverable amount is the cornerstone measurement concept in IAS 36. It is defined as the higher of an asset’s Fair Value Less Costs of Disposal (FVLCOD) and its Value in Use (VIU). The entity uses whichever is higher because it represents the best economic outcome available.
Crucially, an entity need not calculate both measures. If either FVLCOD or VIU individually exceeds the carrying amount, no impairment exists and the other measure need not be estimated.
Fair Value Less Costs of Disposal (FVLCOD)
The price that would be received from selling the asset in an orderly transaction between market participants at the measurement date, less incremental costs directly attributable to disposal.
- → Measured in accordance with IFRS 13 Fair Value hierarchy
- → Disposal costs include: legal fees, stamp duties, transaction taxes, costs to bring to saleable condition
- → Finance costs and income tax are excluded from incremental disposal costs
Value in Use (VIU)
The present value of the future cash flows expected to be derived from an asset or CGU in its current condition, discounted at an appropriate pre-tax rate.
- → Uses entity-specific assumptions, not market participant assumptions
- → Pre-tax discount rate reflecting risks specific to the asset or CGU
- → Nominal cash flows discounted at nominal rate; real cash flows at real rate — be consistent
Key Requirements for Value in Use Cash Flow Projections
The VIU calculation involves estimating future pre-tax cash inflows and outflows from the asset’s continued use, then discounting them. IAS 36 specifies that cash flow projections must:
- Be based on reasonable and supportable assumptions representing management’s best estimate
- Use the most recent management-approved Financial Budgets/forecasts, typically covering a period not exceeding five years
- Extrapolate cash flows beyond the budget period using a steady or declining growth rate (a higher rate can be used only if justified by objective evidence)
- Exclude cash flows from financing activities and income taxes (incorporated into the discount rate instead)
- Reflect the current condition of the asset, not future enhancements or uncommitted restructurings
Do not include in the VIU calculation cash flows from a restructuring that has not yet been committed, or capital expenditures that will enhance the asset’s performance beyond its current state. These are excluded until the entity has actually committed to the plan.
Cash-Generating Units (CGUs) & Goodwill
Many assets cannot generate cash flows independently, a machine on a production line for example, is only valuable as part of the whole operation. A Cash-Generating Unit (CGU) is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or groups of assets. When recoverable amount cannot be determined for an individual asset, impairment testing is performed at the CGU level.
Identifying a CGU – Key Considerations
- 01 How management monitors the entity’s operations (by product line, business unit, geography, etc.)
- 02 How management makes decisions about continuing or disposing of the entity’s assets and operations
- 03 Whether active markets exist for the outputs of a group of assets, indicating that the group generates cash inflows independently
Allocating Goodwill to CGUs
Goodwill acquired in a business combination represents future economic benefits from assets that cannot be individually identified and separately recognised. For impairment testing, goodwill must be allocated to CGUs or groups of CGUs expected to benefit from the combination’s synergies not just to those containing acquired assets.
Each CGU (or group of CGUs) to which goodwill is allocated must represent the lowest level within the entity at which the goodwill is monitored for internal management purposes, and must not be larger than an operating segment as defined under IFRS 8 Operating Segments (before any aggregation).
Impairment Testing Order for a CGU Containing Goodwill
- Calculate the carrying amount of the CGU, including allocated goodwill and pro-rata share of corporate assets
- Determine the recoverable amount of the CGU – higher of FVLCOD and VIU
- If carrying amount exceeds recoverable amount, an impairment loss exists
- Allocate the loss: reduce goodwill to zero first, then reduce other assets within the CGU on a pro-rata basis by carrying amount
- No individual asset’s carrying amount should be reduced below its own separately-determinable recoverable amount, this is the floor rule
- Any remaining unallocated impairment loss after reaching all floors is recognised as a liability only if another standard requires it
Corporate Assets
Corporate assets are assets other than goodwill that contribute to the future cash flows of both the CGU under review and other CGUs for example, a head office building or shared IT infrastructure. IAS 36 requires corporate assets to be allocated to CGUs on a reasonable and consistent basis, typically by reference to a relevant allocation base such as revenue or headcount, before impairment tests are performed at those CGU levels.
Recognising an Impairment Loss
An impairment loss arises when carrying amount exceeds recoverable amount. IAS 36 prescribes specific rules for how and where to recognise this shortfall.
Assets Measured at Cost Model
The impairment loss is recognised immediately in profit or loss. The carrying amount is reduced, and future depreciation or amortisation charges are adjusted to allocate the revised carrying amount over the asset’s remaining useful life.
Revalued Assets (IAS 16 / IAS 38)
The impairment loss is treated as a revaluation decrease. It first offsets any existing revaluation surplus for that asset recognised in OCI. Any excess above the revaluation surplus is then charged to profit or loss.
The Six-Step Impairment Testing Process
- 1
Check for Impairment Indicators
At each reporting date, assess external and internal indicators. Annual testing is mandatory for goodwill, indefinite-life intangibles, and intangibles not yet available for use regardless of whether any indicators are present.
- 2
Determine the Asset or CGU Level
If the asset generates independent cash flows, test at the individual asset level. Otherwise, identify the smallest CGU whose cash flows are largely independent of other assets or groups.
- 3
Calculate the Carrying Amount
Determine the asset’s (or CGU’s) carrying amount at the test date, including any allocated goodwill and proportionate share of relevant corporate assets.
- 4
Estimate the Recoverable Amount
Calculate FVLCOD and/or VIU. Take the higher of the two. If either measure alone exceeds the carrying amount, no further work is needed and no impairment exists.
- 5
Recognise the Impairment Loss
If carrying amount exceeds recoverable amount, recognise the difference as an impairment loss; in profit or loss (cost model) or first against revaluation surplus in OCI (revaluation model).
- 6
Adjust Future Depreciation / Amortisation
Revise the depreciation or amortisation charge prospectively to allocate the asset’s revised carrying amount systematically over its remaining useful life from the impairment date forward.
Reversal of Impairment Losses
At each reporting date, an entity must assess whether there is any indication that an impairment loss recognised in a prior period may no longer exist or may have decreased. If such an indication exists, the entity must estimate the recoverable amount of the asset and recognise a reversal where appropriate.
| Asset Type | Reversal Permitted? | Recognised In | Maximum Reversal Ceiling |
|---|---|---|---|
| Individual assets – cost model | Yes | Profit or Loss | Carrying amount that would have been determined (net of depreciation) had no prior impairment been recognised |
| Revalued assets (IAS 16 / IAS 38) | Yes | OCI (up to revaluation surplus); remainder to Profit or Loss | Same depreciated historical cost ceiling applies |
| CGU assets (non-goodwill) | Yes | Profit or Loss – allocated pro rata across assets | No individual asset raised above its own separately recoverable amount |
| Goodwill | Never | N/A – strictly prohibited | IAS 36.124 – reversal of goodwill impairment is absolutely prohibited under any circumstances |
IAS 36.124 strictly prohibits any reversal of impairment losses recognised on goodwill. The rationale: any subsequent increase in recoverable amount is deemed to represent the generation of new internal goodwill, which IAS 38 prohibits from recognition on the balance sheet. The impairment loss is therefore permanent and irreversible.
Disclosure Requirements Under IAS 36
IAS 36 requires substantial disclosures to enable users of financial statements to evaluate the nature, magnitude, basis, and key assumptions underlying impairment charges and reversals. Disclosures fall into three tiers: per-class disclosures, material individual item disclosures, and CGU-level goodwill disclosures.
For Each Class of Assets (IAS 36.126)
- The amount of impairment losses recognised in profit or loss during the period, and the line item(s) in the statement of comprehensive income where included
- The amount of reversals of impairment losses recognised in profit or loss, and the relevant line item(s)
- Impairment losses on revalued assets recognised directly in other comprehensive income (OCI)
- Reversals of impairment losses on revalued assets credited directly to OCI
For Material Individual Impairment Losses or Reversals (IAS 36.130)
- Description of the asset or CGU impaired, and the events and circumstances leading to recognition of the loss or reversal
- The amount of the impairment loss or reversal, and whether recoverable amount is based on FVLCOD or VIU
- If FVLCOD was used: whether the fair value was determined from an active market, a binding sale agreement, or another valuation method, along with key assumptions applied
- If VIU was used: the discount rate(s) applied in the current period’s estimation and in any prior period VIU estimate for the same asset or CGU
- For CGUs: description of the CGU, the aggregation of assets it comprises, and the basis for identifying the CGU if different from the previous period
CGUs Containing Goodwill or Indefinite-Life Intangibles (IAS 36.134–136)
For each CGU (or group of CGUs) to which a significant amount of goodwill or indefinite-life intangibles has been allocated, the entity must disclose:
- The carrying amount of goodwill and indefinite-life intangible assets allocated to the CGU
- The basis on which recoverable amount was determined i.e. FVLCOD or VIU and the valuation method used
- If VIU: the period over which cash flows have been projected, the growth rate used to extrapolate beyond the budget period, and the discount rate(s) applied
- If FVLCOD: the valuation techniques used and the key inputs, including any IFRS 13 Level 3 inputs with supporting rationale
- Sensitivity analysis: if a reasonably possible change in a key assumption would cause the CGU’s carrying amount to exceed its recoverable amount, the entity must disclose the assumption, the value assigned, and the magnitude of change that would trigger impairment
IAS 36 Testing Frequency Reference Table
| Asset | Applicable Standard | When to Test | Frequency |
|---|---|---|---|
| Goodwill (from business combination) | IFRS 3 / IAS 36 | Every year, regardless of indicators; must align goodwill to CGU | Annual |
| Intangible assets – indefinite useful life | IAS 38 / IAS 36 | Every year, regardless of indicators | Annual |
| Intangible assets – not yet available for use | IAS 38 / IAS 36 | Every year, regardless of indicators | Annual |
| Property, Plant & Equipment | IAS 16 / IAS 36 | Only when impairment indicators are present at the reporting date | Indicator-based |
| Right-of-use assets (leases) | IFRS 16 / IAS 36 | Only when impairment indicators are present at the reporting date | Indicator-based |
| Intangible assets – finite useful life | IAS 38 / IAS 36 | Only when impairment indicators are present at the reporting date | Indicator-based |
| Investments in subsidiaries, associates, JVs | IAS 36 | Only when impairment indicators are present at the reporting date | Indicator-based |
Key Terms & Definitions Glossary
The amount by which the carrying amount of an asset or CGU exceeds its recoverable amount. Recognised immediately in profit or loss, or in OCI for revalued assets.
The amount at which an asset is recognised in the balance sheet after deducting all accumulated depreciation or amortisation and accumulated impairment losses.
The higher of an asset’s Fair Value Less Costs of Disposal and its Value in Use. The benchmark against which carrying amount is compared to determine whether impairment exists.
The price receivable from selling the asset in an arm’s length transaction between knowledgeable, willing parties, less the incremental costs directly attributable to the disposal.
The present value of estimated future cash flows expected from continuing use of an asset in its current condition, including terminal value at disposal, discounted at a pre-tax rate.
The smallest identifiable group of assets generating independent cash inflows. Used when recoverable amount cannot be determined for an individual asset in isolation.
An asset other than goodwill that contributes to cash flows of multiple CGUs (e.g., head office, shared IT systems). Must be allocated to CGUs on a reasonable, consistent basis.
A pre-tax rate reflecting the time value of money and asset-specific risks. May be derived from WACC or market rates, adjusted for risks not already reflected in the cash flow estimates.
The reinstatement of a previously recognised impairment loss when circumstances have reversed. Permitted for most assets but strictly prohibited for goodwill under IAS 36.124.
Frequently Asked Questions on IAS 36
What is the core objective of IAS 36?+
The primary objective of IAS 36 is to ensure that entities do not carry assets in their financial statements at more than their recoverable amount. When an asset’s carrying amount exceeds the economic benefit that can be recovered whether through continued use or through sale, IAS 36 requires the entity to reduce the carrying amount and recognise an impairment loss immediately. This protects the accuracy and integrity of financial statements and gives stakeholders a true and fair view of the entity’s financial position.
Which assets must be tested for impairment every year?+
Three categories of assets require annual impairment testing regardless of whether any impairment indicators exist: (1) goodwill acquired in a business combination, (2) intangible assets with indefinite useful lives, and (3) intangible assets not yet available for use. All other assets are only formally tested when specific internal or external impairment indicators are identified at the end of the reporting period.
Can a goodwill impairment loss ever be reversed under IAS 36?+
No, never. IAS 36 paragraph 124 expressly prohibits the reversal of any impairment loss recognised for goodwill. This prohibition exists because any subsequent increase in an entity’s recoverable amount following a goodwill impairment is deemed to represent the generation of new internal goodwill. Since IAS 38 prohibits the recognition of internally generated goodwill, reinstating a previously impaired goodwill balance would be tantamount to capitalising internal goodwill which is not permitted.
What is the difference between FVLCOD and Value in Use?+
Fair Value Less Costs of Disposal (FVLCOD) represents the price receivable from selling the asset to a third party in an orderly market transaction, net of direct disposal costs. It reflects a market participant perspective and is measured in accordance with IFRS 13. Value in Use (VIU) is the present value of the future cash flows that the specific entity expects to generate from the asset’s continued use, based on entity-specific projections and a pre-tax discount rate. VIU uses management’s internal forecasts rather than market participant assumptions, making it inherently more subjective.
How does climate change affect IAS 36 impairment testing?+
Although IAS 36 does not mention climate change explicitly, climate-related factors can trigger impairment indicators listed in the standard. New emissions-reducing legislation may significantly increase operating costs, reducing a CGU’s projected cash flows. A voluntary commitment to decarbonise operations may lead to earlier-than-planned asset retirements. A shift in customer preferences toward sustainable products can erode demand. Increasing climate-related risk premiums may raise the discount rate used in VIU calculations, reducing recoverable amount. Entities operating in carbon-intensive industries or those with significant stranded-asset exposure must evaluate these factors carefully at each reporting date.
What is a Cash-Generating Unit and how is it identified?+
A Cash-Generating Unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or asset groups. CGU identification is highly judgement-driven and should mirror how management monitors operations and makes decisions about the business. In practice, a CGU may correspond to a retail store, a product line, a business unit, or a geographic segment. The defining criterion is independence of cash inflows, if cash flows from a group of assets are inseparable from the broader operations, a larger CGU may be appropriate.
When is it sufficient to calculate only FVLCOD or only VIU?+
IAS 36 does not require both measures to be calculated in every case. If FVLCOD can be readily determined and exceeds the carrying amount, there is no impairment and VIU need not be calculated. Conversely, if an asset is held for its ongoing use and there is no plan to sell it, VIU may be the more relevant and readily determinable measure. An entity calculates only one if it is clear that one measure alone exceeds carrying amount, saving time and complexity without compromising accuracy.
(Qualified) Chartered Accountant – ICAP
Master of Commerce – HEC, Pakistan
Bachelor of Accounting (Honours) – AeU, Malaysia