IAS 36 Impairment of Assets - Enhanced Summary

IAS 36 Impairment of Assets

IFRS Summaries by Imad Uddin, FRM

Objective of IAS 36

Establish procedures to ensure assets are carried at no more than their recoverable amount, preventing overstatement.

Recognize an impairment loss in profit or loss when carrying amount exceeds recoverable amount.

Prescribe when to reverse a previously recognized impairment loss and mandate disclosures.

Scope

Applies generally to all assets, including PP&E (IAS 16), Intangible Assets (IAS 38), Goodwill, and certain investments.

Excludes assets with specific impairment guidance in other IFRS standards:

Inventories (IAS 2)

Construction Contracts (IFRS 15)

Deferred Tax Assets (IAS 12)

Employee Benefits Assets (IAS 19)

Financial Assets (IFRS 9)

Investment Property @ Fair Value (IAS 40)

Biological Assets @ Fair Value (IAS 41)

Insurance Contract Assets (IFRS 17)

Assets Held for Sale (IFRS 5)

Key Definitions

Term	Definition
Impairment Loss	Amount by which carrying amount of an asset/CGU exceeds its recoverable amount.
Recoverable Amount	Higher of an asset's/CGU's Fair Value Less Costs of Disposal (FVLCD) and its Value in Use (VIU).
Carrying Amount	Asset's value in the balance sheet after deducting accumulated depreciation/amortization and prior impairment losses.
Value in Use (VIU)	Present value of future cash flows expected from an asset/CGU in its current condition (entity-specific).
Fair Value Less Costs of Disposal (FVLCD)	Price received selling an asset in an orderly transaction between market participants, less incremental disposal costs.
Cash-Generating Unit (CGU)	Smallest identifiable group of assets generating largely independent cash inflows.
Costs of Disposal	Incremental costs directly attributable to disposal (e.g., legal, stamp duty, removal), excluding finance costs and tax.

When to Test for Impairment

Annual Testing Required (Regardless of Indicators)

Goodwill acquired in a business combination.

Intangible assets with indefinite useful lives.

Intangible assets not yet available for use.

Must be performed at the same time each year.

Other Testing Triggered by Indicators

For all other assets (e.g., PP&E, finite-life intangibles), test at end of each reporting period IF an indicator of impairment exists.

Must assess both external and internal sources of information for indicators.

Indicators of Impairment

External Indicators

Significant unexpected decline in market value.

Significant adverse changes (tech, market, economic, legal).

Increase in market interest rates (impacts discount rate).

Entity's net assets value > market capitalization (listed co.).

Internal Indicators

Evidence of obsolescence or physical damage.

Adverse changes in asset use (idle, restructure, disposal plan).

Evidence of worse-than-expected economic performance.

Measuring Recoverable Amount

Recoverable Amount = HIGHER of FVLCD and VIU. If either > Carrying Amount, asset is NOT impaired.

Fair Value Less Costs of Disposal (FVLCD)

Best evidence: Binding sale agreement or active market price.

If no active market: Estimate using best available info (similar transactions, valuation techniques).

Deduct costs of disposal (legal, stamp duty, removal, incremental selling costs).

Value in Use (VIU)

Estimate future cash inflows/outflows from use & disposal.

Apply appropriate pre-tax discount rate to find present value.

Use pre-tax cash flows based on reasonable assumptions & current condition.

Projections typically ≤ 5 years + terminal value.

Exclude financing, tax, future uncommitted restructurings, future enhancements.

Discount rate must reflect risks specific to the asset (not already adjusted in cash flows).

Cash-Generating Units (CGUs)

Aspect	Detail
Definition	Smallest group of assets generating largely independent cash inflows. Requires judgment based on management monitoring.
Use	Test at CGU level if individual asset's recoverable amount cannot be determined (e.g., asset doesn't generate independent flows).
Goodwill Allocation	Allocate to CGUs/groups expected to benefit from acquisition synergies. Non-arbitrary basis, lowest level monitored internally (≤ operating segment).
Corporate Assets	Allocate to CGUs if they contribute to cash flows on reasonable basis. If not, test with larger group of CGUs.

Goodwill Specific Requirements

Test annually at the CGU (or group of CGUs) level to which it's allocated.

Compare CGU's carrying amount (incl. goodwill & corporate assets) to its recoverable amount.

If impaired, allocate loss FIRST to reduce goodwill carrying amount.

Allocate remaining loss (after goodwill is zero) pro-rata to other CGU assets.

Crucially: Impairment losses recognized for goodwill CANNOT be reversed in subsequent periods.

Recognizing and Measuring Impairment Losses

Recognizing Loss

Recognize immediately if Recoverable Amount < Carrying Amount.

For assets at cost: Recognize loss in Profit or Loss.

For revalued assets (IAS 16/38): Treat first as revaluation decrease against OCI Revaluation Surplus for that specific asset. Excess loss goes to Profit or Loss.

Allocation of Loss Within a CGU

1. Reduce carrying amount of Goodwill allocated to the CGU first.

2. Allocate remaining loss to other assets in the CGU pro-rata based on their carrying amounts.

Special Notes (Floor Rule)

Individual asset's carrying amount within a CGU cannot be reduced below the HIGHEST of:

Its FVLCD (if measurable).

Its VIU (if measurable).

Zero.

Any loss not allocated due to this floor is re-allocated pro-rata among the other assets in the CGU.

Reversal of Impairment

Conditions for Reversal

Assess at each reporting date for indicators that prior impairment (other than goodwill) has decreased or no longer exists.

Indicators are often the opposite of impairment indicators (improved value, environment, performance).

If indicators exist, recalculate recoverable amount based on changed estimates since last impairment.

Restrictions on Reversal

Goodwill impairment CANNOT be reversed.

This is a critical rule for goodwill.

For other assets, reversal is limited. Increased carrying amount cannot exceed the carrying amount (net of depreciation/amortization) that would have existed had no impairment been recognized previously.

This 'depreciated historical cost ceiling' prevents writing assets up beyond their would-be depreciated value.

Recording Reversal

Recognize immediately.

For assets at cost: Recognize reversal in Profit or Loss.

For revalued assets: Credit reversal first to OCI Revaluation Surplus (reversing prior impairment charged there). Excess reversal (up to ceiling) goes to Profit or Loss.

Adjust future depreciation/amortization to reflect the revised carrying amount over remaining useful life.

Disclosures

General Disclosure Requirements (by asset class)

Amount of impairment losses in P&L (and line item).

Amount of reversals in P&L (and line item).

Amount of impairment losses/reversals in OCI (for revalued assets).

Additional Disclosure for Material Impairments/Reversals

Nature of the asset or CGU.

Amount of the impairment loss or reversal.

Events and circumstances causing the loss/reversal.

Recoverable amount (and whether FVLCD or VIU).

If FVLCD: Valuation technique(s), key assumptions, fair value hierarchy level.

If VIU: Discount rate(s), key assumptions (projection period, growth rates, margins).

For CGUs with significant goodwill/indefinite-life intangibles: Additional details and sensitivity analysis for key assumptions.

Report losses/reversals by reportable segment (IFRS 8).

Practical Example: Goodwill Impairment

CGU Carrying Amount = $500m (Goodwill $100m, Other Net Assets $400m).

Testing indicates Recoverable Amount = $380m.

Total Impairment Loss = $500m - $380m = $120m.

Allocation Steps:

1. Allocate loss to Goodwill first: Reduce Goodwill by $100m (maximum). Goodwill becomes $0.

2. Remaining loss = $120m - $100m = $20m.

3. Allocate remaining $20m loss pro-rata to Other Net Assets. Other Net Assets become $400m - $20m = $380m.

New CGU Carrying Amount = $0 (Goodwill) + $380m (Other Assets) = $380m (matches Recoverable Amount).

The $100m impairment loss allocated to goodwill cannot be reversed later.

_{Disclaimer: These IFRS summaries are provided for educational purposes only.}

_{Imad Uddin is deeply passionate about IFRS and has founded Analyqt, a consulting firm dedicated to helping clients navigate complex accounting and financial reporting challenges. In addition to his advisory work, Imad is committed to education and knowledge-sharing, which led to the creation of IFRSMasterclass.com, a platform offering high-quality IFRS training and resources.}

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