How do you perform an IAS 36 impairment test step by step?

Under IAS 36, an asset is impaired when its carrying amount exceeds its recoverable amount — the higher of Fair Value Less Costs of Disposal (FVLCD) and Value in Use (VIU) — and the excess must be recognised immediately as an impairment loss (IAS 36.8–9). The IAS 36 Impairment Test — Step by Step follows a structured sequence that practitioners must execute carefully to avoid both over- and under-impairment: - Step 1 — Assess impairment indicators (IAS 36.9–12). At each reporting date, assess whether any indicator of impairment exists (external: market value decline, adverse economic changes; internal: obsolescence, asset underperformance). Goodwill, indefinite-life intangibles, and intangibles not yet available for use must be tested annually regardless of indicators (IAS 36.10). - Step 2 — Identify the Cash-Generating Unit (CGU) (IAS 36.65–66). If an individual asset cannot generate cash inflows independently, allocate it to a CGU — the smallest identifiable group of assets generating largely independent cash inflows. Goodwill is allocated to CGUs or groups of CGUs that benefit from the combination synergies (IAS 36.80). - Step 3 — Determine the carrying amount (IAS 36.75). Include all assets allocated to the CGU (property, plant and equipment, intangibles, goodwill, and allocated corporate assets) at their current net book value, excluding financial assets and deferred tax balances.

How do you determine and gross up the pre-tax discount rate for a VIU calculation under IAS 36.55?

- Step 4 — Calculate recoverable amount as the higher of FVLCD and VIU (IAS 36.18–57). VIU is the present value of future cash flows expected from the asset/CGU, discounted using a pre-tax rate reflecting market assessments of the time value of money and asset-specific risks (IAS 36.55–57). FVLCD uses a Level 1–3 hierarchy consistent with IFRS 13. You only need one measure if either already exceeds carrying amount. - Step 5 — Recognise and allocate the impairment loss (IAS 36.59–63). If carrying amount exceeds recoverable amount, recognise the difference as an impairment loss in P&L. For a CGU, allocate the loss first against goodwill, then pro rata across remaining assets — but no individual asset can be written below the highest of its own FVLCD, VIU, or zero (IAS 36.104–105). - Step 6 — Disclosure (IAS 36.126–137). Disclose for each material impairment: the CGU description, amount recognised, the recoverable amount basis, and key assumptions including discount rate, growth rate, and sensitivity analysis for goodwill CGUs. Scenario: A manufacturing CGU has a carrying amount of €5,200,000 (including €800,000 goodwill). Management calculates VIU of €4,600,000 using a pre-tax discount rate of 12%. FVLCD is estimated at €4,400,000. Recoverable amount = max(€4,600,000; €4,400,000) = €4,600,000

When can a previously recognised impairment loss on goodwill be reversed under IAS 36?

Impairment loss = €5,200,000 − €4,600,000 = €600,000 | Asset | Carrying Amount (€) | Loss Allocated (€) | Revised Carrying (€) | |---|---|---|---| | Goodwill | 800,000 | 600,000 | 200,000 | | PP&E & other | 4,400,000 | — | 4,400,000 | | Total CGU | 5,200,000 | 600,000 | 4,600,000 | Since the loss (€600,000) is less than goodwill (€800,000), it is absorbed entirely by goodwill. | Account | Dr (€) | Cr (€) | |---|---|---| | Impairment loss — P&L | 600,000 | | | Accumulated impairment — Goodwill | | 600,000 | - Using post-tax cash flows with a post-tax discount rate inconsistently. IAS 36 requires a pre-tax discount rate (IAS 36.55), yet VIU models frequently import WACC without grossing it up — overstating recoverable amount and understating impairment risk. The pre- and post-tax bases must produce consistent results.

How should corporate assets be allocated across multiple CGUs when a direct allocation is not possible under IAS 36.102–103?

- Incorrect CGU definition. Grouping assets too broadly to avoid impairment is an audit red flag. Management must demonstrate that cash inflows are largely independent; combining CGUs that share only a common overhead pool does not satisfy IAS 36.65. - Omitting corporate assets (IAS 36.102–103). Head-office assets (IT systems, HQ building) must be allocated to CGUs on a reasonable, consistent basis. Excluding them understates the CGU carrying amount and artificially suppresses the impairment loss. - IAS 36.9–12 — Impairment indicators (external and internal sources) - IAS 36.18–57 — Measurement of recoverable amount, VIU, and FVLCD - IAS 36.55–57 — Discount rate requirements for VIU (pre-tax, market-consistent) - IAS 36.80–99 — Goodwill allocation to CGUs and annual impairment test requirements - IAS 36.104–105 — Loss allocation order within a CGU and the floor on individual asset write-downs - IAS 36.134 — Required sensitivity disclosures for goodwill and indefinite-life intangibles

IAS 36 Impairment Test — Step by Step

IAS 36 Impairment Test — Core Rule

Under IAS 36, an asset is impaired when its carrying amount exceeds its recoverable amount — the higher of Fair Value Less Costs of Disposal (FVLCD) and Value in Use (VIU) — and the excess must be recognised immediately as an impairment loss (IAS 36.8–9).

How IAS 36 Impairment Test Works

The IAS 36 Impairment Test — Step by Step follows a structured sequence that practitioners must execute carefully to avoid both over- and under-impairment:

Step 1 — Assess impairment indicators (IAS 36.9–12). At each reporting date, assess whether any indicator of impairment exists (external: market value decline, adverse economic changes; internal: obsolescence, asset underperformance). Goodwill, indefinite-life intangibles, and intangibles not yet available for use must be tested annually regardless of indicators (IAS 36.10).

Step 2 — Identify the Cash-Generating Unit (CGU) (IAS 36.65–66). If an individual asset cannot generate cash inflows independently, allocate it to a CGU — the smallest identifiable group of assets generating largely independent cash inflows. Goodwill is allocated to CGUs or groups of CGUs that benefit from the combination synergies (IAS 36.80).

Step 3 — Determine the carrying amount (IAS 36.75). Include all assets allocated to the CGU (property, plant and equipment, intangibles, goodwill, and allocated corporate assets) at their current net book value, excluding financial assets and deferred tax balances.

Step 4 — Calculate recoverable amount as the higher of FVLCD and VIU (IAS 36.18–57). VIU is the present value of future cash flows expected from the asset/CGU, discounted using a pre-tax rate reflecting market assessments of the time value of money and asset-specific risks (IAS 36.55–57). FVLCD uses a Level 1–3 hierarchy consistent with IFRS 13. You only need one measure if either already exceeds carrying amount.

Step 5 — Recognise and allocate the impairment loss (IAS 36.59–63). If carrying amount exceeds recoverable amount, recognise the difference as an impairment loss in P&L. For a CGU, allocate the loss first against goodwill, then pro rata across remaining assets — but no individual asset can be written below the highest of its own FVLCD, VIU, or zero (IAS 36.104–105).

Step 6 — Disclosure (IAS 36.126–137). Disclose for each material impairment: the CGU description, amount recognised, the recoverable amount basis, and key assumptions including discount rate, growth rate, and sensitivity analysis for goodwill CGUs.

IAS 36 Impairment Test — Practical Example

Scenario: A manufacturing CGU has a carrying amount of €5,200,000 (including €800,000 goodwill). Management calculates VIU of €4,600,000 using a pre-tax discount rate of 12%. FVLCD is estimated at €4,400,000.

Recoverable amount = max(€4,600,000; €4,400,000) = €4,600,000

Impairment loss = €5,200,000 − €4,600,000 = €600,000

Allocation of impairment loss

Asset	Carrying Amount (€)	Loss Allocated (€)	Revised Carrying (€)
Goodwill	800,000	600,000	200,000
PP&E & other	4,400,000	—	4,400,000
Total CGU	5,200,000	600,000	4,600,000

Since the loss (€600,000) is less than goodwill (€800,000), it is absorbed entirely by goodwill.

Journal entry

Account	Dr (€)	Cr (€)
Impairment loss — P&L	600,000
Accumulated impairment — Goodwill		600,000

IAS 36 Impairment Test — Common Pitfalls

Using post-tax cash flows with a post-tax discount rate inconsistently. IAS 36 requires a pre-tax discount rate (IAS 36.55), yet VIU models frequently import WACC without grossing it up — overstating recoverable amount and understating impairment risk. The pre- and post-tax bases must produce consistent results.

Incorrect CGU definition. Grouping assets too broadly to avoid impairment is an audit red flag. Management must demonstrate that cash inflows are largely independent; combining CGUs that share only a common overhead pool does not satisfy IAS 36.65.

Omitting corporate assets (IAS 36.102–103). Head-office assets (IT systems, HQ building) must be allocated to CGUs on a reasonable, consistent basis. Excluding them understates the CGU carrying amount and artificially suppresses the impairment loss.

IAS 36 Impairment Test — Key Paragraphs

IAS 36.9–12 — Impairment indicators (external and internal sources)
IAS 36.18–57 — Measurement of recoverable amount, VIU, and FVLCD
IAS 36.55–57 — Discount rate requirements for VIU (pre-tax, market-consistent)
IAS 36.80–99 — Goodwill allocation to CGUs and annual impairment test requirements
IAS 36.104–105 — Loss allocation order within a CGU and the floor on individual asset write-downs
IAS 36.134 — Required sensitivity disclosures for goodwill and indefinite-life intangibles