IAS 36 Impairment of Assets: A Practical Guide for Finance Professionals

What Is IAS 36?

IAS 36 Impairment of Assets sets out the procedures to ensure that assets are not carried at more than their recoverable amount. The recoverable amount is the higher of fair value less costs of disposal (FVLCD) and value in use (VIU). Impairment testing is triggered by indicators of impairment (or annually for goodwill and indefinite-life intangibles regardless of indicators). IAS 36 is one of the most judgement-intensive standards and a frequent focus of external auditors and regulators.

Indicators of Impairment

External indicators include: significant decline in market value, significant adverse changes in technology, markets, economy or law, increases in market interest rates, and carrying amount of net assets exceeding market capitalisation. Internal indicators include: evidence of obsolescence or physical damage, significant changes in use of the asset, and worse-than-expected operating results.

Cash-Generating Units

When it is not possible to estimate the recoverable amount of an individual asset, the impairment test is performed at the level of the Cash-Generating Unit (CGU) — the smallest identifiable group of assets that generates cash inflows largely independently. Goodwill is allocated to CGUs that are expected to benefit from the synergies of the business combination.

Value in Use

VIU is the present value of future cash flows expected to be derived from an asset or CGU. The cash flow projections are based on reasonable management assumptions, typically covering a detailed forecast period (usually 5 years) plus a terminal value. The discount rate is a pre-tax rate that reflects the current market assessment of the time value of money and asset-specific risks.

Fair Value Less Costs of Disposal

FVLCD is the price that would be received to sell the asset in an orderly transaction between market participants at the measurement date, less costs of disposal. It follows IFRS 13 Fair Value Measurement hierarchy: Level 1 (quoted prices), Level 2 (observable inputs), Level 3 (unobservable inputs).

Impairment Loss Recognition and Reversal

If carrying amount exceeds recoverable amount, an impairment loss is recognised. For CGUs with goodwill, the loss is first allocated to reduce goodwill to zero, then to other assets pro-rata. Goodwill impairment cannot be reversed. For other assets, reversal is permitted in subsequent periods if the recoverable amount has increased due to changes in estimates.

Further Reading

• Accounting Standards CPD
• ACCA SBR Guide
• IFRS 9 Guide

CPD on IAS 36

Learnsignal's CPD includes IAS 36 impairment testing modules with worked examples. Explore CPD.