When can an impairment loss be reversed under IAS 36.110–117, and why is goodwill excluded from reversal?

Recoverable amount is the higher of fair value less costs of disposal (FVLCD) and value in use (VIU) (IAS 36.18). You do not need to calculate both — if either amount already exceeds carrying amount, the asset is not impaired and no further calculation is required (IAS 36.19). For value in use, the calculation involves: - Estimating future cash inflows and outflows from continuing use and ultimate disposal (IAS 36.31) - Basing projections on reasonable and supportable assumptions, using the most recent approved budgets or forecasts, generally covering no more than five years (IAS 36.33) - Applying an appropriate pre-tax discount rate that reflects current market assessments of the time value of money and asset-specific risks (IAS 36.30) Compare the carrying amount with recoverable amount. If carrying amount exceeds recoverable amount, the difference is an impairment loss. Recognise it immediately in profit or loss unless the asset is carried at a revalued amount, in which case it is treated as a revaluation decrease (IAS 36.60). Note that an entity shall not recognise a liability for an impairment loss beyond the asset's carrying amount unless another Standard specifically requires it (IAS 36.62).

How should terminal value be calculated in a VIU model — perpetuity growth versus steady-state — and what growth rate is defensible?

- Skipping mandatory annual tests. Goodwill and intangible assets with indefinite useful lives require an annual impairment test regardless of whether indicators exist. For goodwill-bearing CGUs, the test must be performed at the same time each year (IAS 36.90). - Wrong sequencing when goodwill is involved. When a CGU holds both goodwill and other assets, test individual assets within the CGU first, recognise any losses on those assets, and only then test the CGU as a whole (IAS 36.98). - Forgetting deferred tax. Once an impairment loss is recognised and the carrying amount revised, any related deferred tax assets or liabilities must be recalculated by comparing the revised carrying amount with the asset's tax base (IAS 36.64). - Overlooking reversal requirements. At each reporting date, assess whether impairment losses recognised in prior periods may have reversed for assets other than goodwill — goodwill impairment is never reversed (IAS 36.110). - IAS 36.8 — Core definition: an asset is impaired when carrying amount exceeds recoverable amount - IAS 36.18 — Recoverable amount defined as the higher of FVLCD and value in use - IAS 36.31 — The two steps required to estimate value in use: cash flow estimation and discounting - IAS 36.60 — Recognition rule: impairment losses go to profit or loss unless the asset is revalued - IAS 36.90 — Annual impairment test requirement for goodwill-bearing CGUs, comparing carrying amount including goodwill with recoverable amount - IAS 36.110 — Obligation to assess at each reporting date whether prior-period impairment losses may have reversed

IAS 36 Impairment Test — CGU, FVLCD and VIU

IAS 36 — Core Rule

An asset is impaired when its carrying amount exceeds its recoverable amount (IAS 36.8). At the end of each reporting period, you must assess whether any indication of impairment exists — and if it does, you are required to estimate recoverable amount. For certain assets, the annual test is mandatory regardless of whether any indicator is present (IAS 36.10). Where an impairment loss is confirmed, it must be recognised immediately in profit or loss, unless the asset is carried at a revalued amount (IAS 36.60).

How IAS 36 Works

Step 1 — Identify indicators

Assess impairment indicators at each reporting date. IAS 36.12 sets out a minimum list of external and internal sources to consider:

External indicators: significant decline in market value, adverse changes in the technological, market, legal or economic environment, or increases in market interest rates

Internal indicators: evidence of physical damage or obsolescence, plans to restructure or dispose of an asset, or worse-than-expected cash flows or operating results from internal reporting (IAS 36.14)
Other indicators not on the list may also trigger the need to estimate recoverable amount — the list is explicitly non-exhaustive (IAS 36.13)

Even where no impairment loss ultimately results, an indicator may signal the need to review and revise the asset's remaining useful life, depreciation method, or residual value (IAS 36.17).

Step 2 — Determine the unit of account

Recoverable amount is first assessed for the individual asset. Where an asset does not generate cash inflows that are largely independent of other assets, testing moves to the cash-generating unit (CGU) — the smallest identifiable group of assets generating independent cash inflows (IAS 36.22).

Identify CGU boundaries consistently from period to period

Corporate assets that cannot generate independent cash flows must be allocated to CGUs on a reasonable and consistent basis for testing purposes (IAS 36.102)
Goodwill acquired in a business combination must be allocated to the CGU or group of CGUs expected to benefit from the combination's synergies

Step 3 — Measure recoverable amount

Recoverable amount is the higher of fair value less costs of disposal (FVLCD) and value in use (VIU) (IAS 36.18). You do not need to calculate both — if either amount already exceeds carrying amount, the asset is not impaired and no further calculation is required (IAS 36.19).

For value in use, the calculation involves:

Estimating future cash inflows and outflows from continuing use and ultimate disposal (IAS 36.31)
Basing projections on reasonable and supportable assumptions, using the most recent approved budgets or forecasts, generally covering no more than five years (IAS 36.33)
Applying an appropriate pre-tax discount rate that reflects current market assessments of the time value of money and asset-specific risks (IAS 36.30)

Step 4 — Recognise any impairment loss

Compare the carrying amount with recoverable amount. If carrying amount exceeds recoverable amount, the difference is an impairment loss. Recognise it immediately in profit or loss unless the asset is carried at a revalued amount, in which case it is treated as a revaluation decrease (IAS 36.60). Note that an entity shall not recognise a liability for an impairment loss beyond the asset's carrying amount unless another Standard specifically requires it (IAS 36.62).

IAS 36 — Common Pitfalls

Skipping mandatory annual tests. Goodwill and intangible assets with indefinite useful lives require an annual impairment test regardless of whether indicators exist. For goodwill-bearing CGUs, the test must be performed at the same time each year (IAS 36.90).

Wrong sequencing when goodwill is involved. When a CGU holds both goodwill and other assets, test individual assets within the CGU first, recognise any losses on those assets, and only then test the CGU as a whole (IAS 36.98).
Forgetting deferred tax. Once an impairment loss is recognised and the carrying amount revised, any related deferred tax assets or liabilities must be recalculated by comparing the revised carrying amount with the asset's tax base (IAS 36.64).
Overlooking reversal requirements. At each reporting date, assess whether impairment losses recognised in prior periods may have reversed for assets other than goodwill — goodwill impairment is never reversed (IAS 36.110).

IAS 36 — Key Paragraphs

IAS 36.8 — Core definition: an asset is impaired when carrying amount exceeds recoverable amount
IAS 36.18 — Recoverable amount defined as the higher of FVLCD and value in use
IAS 36.31 — The two steps required to estimate value in use: cash flow estimation and discounting
IAS 36.60 — Recognition rule: impairment losses go to profit or loss unless the asset is revalued
IAS 36.90 — Annual impairment test requirement for goodwill-bearing CGUs, comparing carrying amount including goodwill with recoverable amount
IAS 36.110 — Obligation to assess at each reporting date whether prior-period impairment losses may have reversed

IAS 36 — Performing the Impairment Test

How do you perform an impairment test under IAS 36?