IAS 36
Active
Impairment of Assets
Prescribes procedures to ensure that assets are carried at no more than their recoverable amount, including impairment testing, recognition and reversal of impairment losses.
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Conceptual Framework Linkage
Asset measurement under the Framework
IAS 36 ensures assets are not carried at more than their recoverable amount, upholding the Framework's principle that financial statements should faithfully represent economic reality – an overvalued asset violates faithful representation.
HOW IMPAIRMENT PRESERVES FAITHFUL REPRESENTATION
Measurement basis – assets must be measured at no more than recoverable amount (higher of FVLCD or VIU) Timeliness – impairment losses recognised as soon as indicators appear, not deferred Prudence – losses recognised, gains deferred (no upward revaluation unless reversal rules)
The Framework's "relevance" characteristic demands impairment testing when indicators exist – ignoring deterioration would make statements irrelevant to users.
Recoverable amount defined by Framework
Recoverable amount = Higher of Fair Value Less Costs of Disposal (FVLCD) and Value in Use (VIU) – both are current-value measurement bases permitted by the Framework.
Framework basisIAS 36 use
Fair value less costs of disposalMarket-based valuation (if available)
Value in useEntity-specific present value of future cash flows
Substance over form: IAS 36 looks beyond legal ownership to economic reality – a CGU may include assets not legally owned by the entity if they contribute to cash flows.
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Scope & Applicability
Which assets IAS 36 applies to
IAS 36 applies to ALL assets except those explicitly excluded – this includes PPE (IAS 16), Intangibles (IAS 38), Investment property (IAS 40), and many others.
SCOPE EXCLUSIONS – SPECIFIC STANDARDS GOVERN
Inventories → IAS 2 (lower of cost and NRV) Construction contracts → IAS 11 Deferred tax assets → IAS 12 Financial instruments → IFRS 9 Assets arising from insurance contracts → IFRS 4 Non‑current assets held for sale → IFRS 5 (measured at lower of carrying amount and FVLCS)
Goodwill acquired in a business combination is ALWAYS tested for impairment under IAS 36 (annual mandatory test), even though recognised under IFRS 3.
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Impairment Test Trigger
Mandatory annual testing (no indicators needed)
Certain assets MUST be tested annually regardless of whether impairment indicators exist.
ASSETS SUBJECT TO ANNUAL TESTING
Goodwill (allocated to a CGU) Intangible assets with an indefinite useful life Intangible assets not yet available for use
Not optional: Annual testing is compulsory for these assets – failure to test constitutes non‑compliance.
Indicator‑based testing
For other assets, impairment testing is required ONLY when there is an indicator that the asset may be impaired.
EXTERNAL INDICATORS OF IMPAIRMENT
Market value decline significantly below carrying amount Significant adverse changes in technology, markets, economy, or law Increase in market interest rates affecting discount rates Carrying amount of net assets exceeds market capitalisation
INTERNAL INDICATORS OF IMPAIRMENT
Evidence of obsolescence or physical damage Significant adverse changes in how asset is used (idle, restructuring) Worse‑than‑expected operating or cash flow performance Evidence from internal reporting that asset underperforms expectations
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Recoverable Amount
Recoverable amount = Higher of FVLCD and VIU
The recoverable amount is the higher of Fair Value Less Costs of Disposal (FVLCD) and Value in Use (VIU). Impairment loss = Carrying amount − Recoverable amount.
Fair Value Less Costs of Disposal (FVLCD)
The amount obtainable from selling the asset in an orderly transaction between market participants, minus direct incremental costs of disposal.
Value in Use (VIU)
Present value of future cash flows expected from continuing use of asset and its disposal at end of useful life.
If recoverable amount cannot be determined for an individual asset, test the CGU to which the asset belongs. VIU calculations exclude cash flows from future restructuring or improvements not yet committed.
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Cash‑Generating Units
CGU definition and allocation
A CGU is the smallest identifiable group of assets that generates cash inflows largely independent of other assets/groups. Goodwill is allocated to CGUs for impairment testing.
CGU IDENTIFICATION RULES
Cash inflows must be largely independent of other assets/groups If internal transfer pricing exists, cash flows considered at market prices CGU should not be larger than an operating segment as defined by IFRS 8 Assets that cannot be individually tested must belong to a CGU
Goodwill is allocated to CGUs (or groups of CGUs) at acquisition – subsequent impairment testing must consider this allocation.
Worked example – CGU with goodwill
Example: Acquired business unit
Entity acquires Business X for $10m. Net identifiable assets = $7m, goodwill = $3m. Business X comprises two CGUs: Division A (VIU = $4m, CA = $3m) and Division B (VIU = $3m, CA = $4m). Goodwill allocated equally.
CGU A recoverable amount = $4m (VIU)
CGU A carrying amount = $3m + $1.5m goodwill = $4.5m
CGU A impairment = $4.5m − $4m = $0.5m
Loss allocated first to goodwill ($1.5m), then to other assets ($0m left).
CGU A carrying amount = $3m + $1.5m goodwill = $4.5m
CGU A impairment = $4.5m − $4m = $0.5m
Loss allocated first to goodwill ($1.5m), then to other assets ($0m left).
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Impairment Recognition
Journal entries and allocation
Impairment losses are recognised immediately in profit or loss (except for revalued assets where loss reverses previous revaluation surplus).
IMPAIRMENT ALLOCATION ORDER
First, reduce any remaining revaluation surplus for that asset (if revaluation model used) Then, recognise impairment loss in profit or loss For CGUs with goodwill, allocate loss first to goodwill, then to other assets pro‑rata based on carrying amounts
Dr
Impairment loss
SOPL
Cr
Accumulated impairment
SOFP – asset ↓
Impairment losses on goodwill can NEVER be reversed – once written down, goodwill stays reduced.
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Impairment Reversal
Reversal conditions and limits
An impairment loss may be reversed ONLY if there has been a change in estimates used to determine recoverable amount (excluding goodwill).
REVERSAL LIMITATIONS
Goodwill impairment NEVER reversed Reversal cannot increase CA above what it would have been had no impairment occurred (original CA minus normal depreciation/amortisation) Reversal recognised in profit or loss (except for revalued assets where reversal goes to revaluation surplus)
Dr
Asset (reversal)
SOFP
Cr
Reversal of impairment loss
SOPL
Worked example – reversal
Example: Machinery impairment reversal
Machinery originally cost $100k, depreciated $20k to CA $80k. Impaired to $60k. Two years later, estimates improve and recoverable amount rises to $75k. Normal depreciation over two years would have been $10k.
Original CA without impairment = $80k − $10k = $70k
Maximum reversal = $70k − $60k = $10k
Actual reversal = min($75k − $60k, $10k) = $10k
New CA = $60k + $10k = $70k.
Maximum reversal = $70k − $60k = $10k
Actual reversal = min($75k − $60k, $10k) = $10k
New CA = $60k + $10k = $70k.
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Disclosure Requirements
Mandatory disclosures for each class of assets
FOR IMPAIRMENT LOSSES RECOGNISED/RECOVERED
Amount of impairment losses recognised in profit or loss Amount of reversals of impairment losses recognised in profit or loss Line item(s) in statement of profit or loss where losses/reversals included
FOR ASSETS TESTED
Events/circumstances leading to impairment/reversal Description of assets/CGU(s) affected Recoverable amount determination basis (FVLCD or VIU) Key assumptions used in VIU calculations (growth rates, discount rates)
For goodwill and indefinite‑life intangibles, disclosure includes a description of CGU(s), carrying amount of goodwill/intangible, and basis for recoverable amount.
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Critical Judgments & Estimates
Where management judgement matters most
SIGNIFICANT ESTIMATES (IAS 8 – reviewed annually)
Future cash flow projections for VIU calculations Discount rates reflecting current market assessments Growth rates used in cash flow projections Useful lives and residual values of assets in CGUs
SIGNIFICANT JUDGEMENTS
Identifying CGUs and allocating goodwill to CGUs Determining whether impairment indicators exist Assessing whether active market exists for FVLCD Determining appropriate discount rate for VIU
Changes in estimates (e.g., cash flow projections, discount rates) trigger impairment testing – not just external indicators.
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IFRS vs US GAAP – Key Differences
Comparison – IAS 36 vs US GAAP (ASC 350 / ASC 360)
FeatureIFRS (IAS 36)US GAAP
Impairment modelRecoverable amount model (higher of FVLCD and VIU)Fair value model (ASC 350) or undiscounted cash flow test (ASC 360)
Impairment reversalPermitted (except for goodwill)Prohibited – never reversed
CGU levelCash-generating unit (smallest identifiable cash inflow group)Reporting unit (operating segment or one level below)
Annual testingRequired for goodwill, indefinite-life intangibles, intangibles not yet available for useRequired for goodwill and indefinite-lived intangibles
Discount ratePre-tax rate reflecting current market assessmentsEntity's incremental borrowing rate or other appropriate rate
The most significant difference is impairment reversal – under IFRS, reversal is permitted (except for goodwill) when conditions improve; under US GAAP, impairments are permanent.
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Statement Mapping – Where Impairment Events Land
Comprehensive event-to-statement mapping table
Event / transactionStatement(s) affectedNotes
Impairment loss recognised (PPE, finite-life intangibles)SOPL SOFPExpense in SOPL; accumulated impairment reduces SOFP carrying amount
Impairment loss on revalued assetOCI (to extent of revaluation surplus) then SOPLFirst reduces revaluation surplus in OCI, excess to SOPL
Impairment reversal (except goodwill)SOPL SOFPIncome in SOPL; accumulated impairment reduced in SOFP
Goodwill impairmentSOPL SOFPNever reversed; tested annually at CGU level
Unwinding of discount on provisionSOPL (finance cost)Increases provision liability; recognised as finance cost
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Related Standards – Cross-Reference Map
How IAS 36 connects across the IFRS body of literature
StandardNature of the connection
IAS 16PPE impairment testing – IAS 36 provides the impairment mechanics for PPE measured under cost or revaluation model
IAS 38Intangible asset impairment – IAS 36 provides mandatory annual testing for indefinite-life intangibles and those not yet available for use
IFRS 3Goodwill impairment – goodwill acquired in business combinations tested annually under IAS 36 at CGU level
IAS 28Investments in associates/joint ventures – impairment tested under IAS 36 after applying equity method
IAS 40Investment property impairment – IAS 36 applies to investment property measured at cost (fair value model uses fair value directly)
IAS 2Inventories excluded – measured at lower of cost and NRV under IAS 2, not IAS 36
IFRS 5Assets held for sale – measured at lower of carrying amount and FVLCS, not IAS 36 recoverable amount
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Quick-Reference Glossary
Recoverable amount
Higher of fair value less costs of disposal (FVLCD) and value in use (VIU).
Value in use (VIU)
Present value of future cash flows expected from continuing use of asset and its disposal at end of useful life.
Cash-generating unit (CGU)
Smallest identifiable group of assets that generates cash inflows largely independent of other assets/groups.
Goodwill
Future economic benefits from assets not individually identified/recognised separately; tested for impairment annually at CGU level.
Impairment loss
Amount by which carrying amount exceeds recoverable amount.
Carrying amount
Amount at which asset is recognised after deducting accumulated depreciation/amortisation and impairment losses.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows
History & Development
May-97
Exposure Draft E55 Impairment of Assets
Jun-98
IAS 36 Impairment of Assets
Operative for financial statements covering periods beginning on or after 1 July 1999
31-Mar-2004
IAS 36 Impairment of Assets revised
Applies to goodwill and intangible assets acquired in business combinations for which the agreement date is on or after 31 March 2004, and for all other assets prospectively from the beginning of the first annual period beginning on or after 31 March 2004
22-May-2008
Amended by Annual Improvements to IFRSs 2007 (disclosure of estimates used to determine a recoverable amount)
Effective for annual periods beginning on or after 1 January 2009
16-Apr-2009
Amended by Annual Improvements to IFRSs 2009 (units of accounting for goodwill impairment testing using segments under IFRS 8 before aggregation)
Effective for annual periods beginning on or after 1 January 2010
29-May-2013
Amended by Recoverable Amount Disclosures for Non-Financial Assets (clarification of disclosures required)
Effective for annual periods beginning on or after 1 January 2014