Overview

IAS 36 Impairment of Assets requires that assets not be carried at more than their recoverable amount — the higher of fair value less costs of disposal (FVLCD) and value in use (VIU). When a carrying amount exceeds recoverable amount, an impairment loss is recognised.

IAS 36 applies to most non-financial assets, including property, plant and equipment (IAS 16), intangible assets including goodwill (IAS 38, IFRS 3), right-of-use assets (IFRS 16), and investments in subsidiaries, associates and joint ventures. It does not apply to inventories (IAS 2), financial assets (IFRS 9), deferred tax (IAS 12), or assets arising from employee benefits (IAS 19).

Impairment Indicators

For most assets, an impairment test is triggered when there is an indication that an asset may be impaired (IAS 36.12).

External indicators include significant market value decline, adverse changes in the regulatory or competitive environment, and rising market interest rates. Internal indicators include evidence of obsolescence, damage, restructuring decisions, or worse-than-expected internal performance reporting.

Mandatory annual test: goodwill acquired in a business combination and intangible assets with indefinite useful lives must be tested every year regardless of whether indicators exist (IAS 36.10).

Recoverable Amount and Impairment Loss

Recoverable amount is the higher of:

• FVLCD — the price obtainable in an orderly transaction minus incremental disposal costs
• VIU — the present value of future cash flows, discounted at a pre-tax rate reflecting time value and asset-specific risk (IAS 36.30)

When the carrying amount exceeds recoverable amount, the difference is an impairment loss, recognised in profit or loss (IAS 36.59). For revalued assets, the loss first reduces any existing revaluation surplus in OCI.

Impairment testing is usually performed at the level of the cash-generating unit (CGU) — the smallest identifiable group of assets generating cash inflows largely independent of those from other assets (IAS 36.6).

For the full step-by-step methodology — CGU identification, FVLCD vs VIU calculation, cash flow projections, discount rate, and a worked example — see IAS 36 — Performing the Impairment Test.

Goodwill Impairment

Goodwill has an indefinite life and is never amortised. It must be tested for impairment annually and whenever indicators exist (IAS 36.96). Testing is performed at the CGU (or group of CGUs) to which the goodwill has been allocated (IAS 36.80).

When the CGU's recoverable amount falls below its carrying amount, the impairment loss is allocated in this order:

1. First, reduce goodwill allocated to the CGU to zero
2. Then, reduce other assets in the CGU pro-rata, subject to not reducing any individual asset below the highest of its FVLCD, VIU, or zero

Goodwill impairment cannot be reversed (IAS 36.124) — unlike impairment losses on other assets, which must be assessed for reversal at every reporting date.

Reversal of Impairment

At each reporting date, entities must assess whether there is any indication that a previously recognised impairment loss may have decreased or no longer exist (IAS 36.110). If so, the recoverable amount is recalculated.

A reversal is recognised when estimates used to determine recoverable amount have improved since the last impairment loss was recognised. The reversal is capped at the carrying amount that would have applied had no impairment ever been recognised (net of depreciation) (IAS 36.117).

Goodwill impairment: no reversal permitted (IAS 36.124).

Disclosures

IAS 36.126–137 requires, for each class of assets:

• Impairment losses and reversals recognised in the period, by income statement line
• For material impairments: description of the CGU, carrying amount, recoverable amount, and basis (FVLCD or VIU)
• For VIU: key assumptions, discount rate, period of projections, terminal growth rate, and sensitivity analysis
• For goodwill CGUs with significant carrying amounts: recoverable amount, discount rate, and sensitivity to reasonably possible changes in assumptions

Summary