IAS 36 Impairment of Assets — Complete Guide

What is IAS 36?

IAS 36 Impairment of Assets ensures that assets in a company's financial statements are not carried at more than their recoverable amount. If an asset's carrying amount exceeds what the company can recover from using or selling it, an impairment loss must be recognised.

IAS 36 applies to most non-financial assets including property, plant and equipment, intangible assets, goodwill, investments in subsidiaries, and right-of-use assets (under IFRS 16).

When to Test for Impairment

Assets are tested for impairment in two ways:

• Indicator-based testing: When there is an indication of impairment (internal or external indicator), the asset is tested
• Annual mandatory testing: Goodwill, indefinite-life intangibles, and intangibles not yet available for use must be tested annually regardless of indicators

Impairment Indicators

External indicators: Market value decline; adverse changes in technology, market, economic, or legal environment; increases in market interest rates; carrying amount of net assets exceeds market capitalisation

Internal indicators: Evidence of obsolescence; physical damage; significant changes in how/how much the asset is used; internal reports indicating economic performance worse than expected

Recoverable Amount

Recoverable amount = the HIGHER of:

• Fair Value Less Costs of Disposal (FVLCD): The amount obtainable from the sale of the asset in an arm's length transaction between knowledgeable, willing parties, less costs of disposal
• Value in Use (VIU): Present value of estimated future cash flows expected to arise from the asset's continued use and disposal

An impairment loss = Carrying Amount − Recoverable Amount (when carrying amount > recoverable amount)

Cash-Generating Units (CGUs)

If an individual asset does not generate cash flows independently, the impairment test is applied to its Cash-Generating Unit (CGU) — the smallest identifiable group of assets that generates cash inflows largely independently of other assets.

Allocating Goodwill to CGUs

Goodwill acquired in a business combination must be allocated to CGUs expected to benefit from the combination synergies. Goodwill impairment is tested at CGU level:

1. Compare CGU carrying amount (including allocated goodwill) to CGU recoverable amount
2. Impairment loss reduces goodwill first, then other CGU assets pro rata
3. Goodwill impairment CANNOT be reversed in subsequent periods

Recognising and Reversing Impairment Losses

• Impairment loss recognised in P&L (unless asset carried at revalued amount, in which case recognised in OCI first to eliminate revaluation surplus)
• Asset remeasured to recoverable amount; useful life and depreciation method reviewed
• Reversal: Allowed for individual assets (except goodwill) if indicators no longer exist — reversed through P&L (or OCI for revalued assets); carrying amount after reversal must not exceed depreciated cost

IAS 36 is a high-frequency exam topic in ACCA FR and SBR. Prepare with Learnsignal.

Further Reading

• IFRS 15 Revenue from Contracts with Customers — Complete Guide
• IFRS 16 Leases — Complete Guide for Finance Students
• IFRS 9 Financial Instruments — Complete Guide
• IAS 38 Intangible Assets — Complete Guide

Study ACCA with Learnsignal — covering all IFRS standards