Impairment Framework for Non-Financial Assets (IAS 36)

Assets reported in the statement of financial position must not exceed the expected economic benefits they will provide, referred to as the ‘recoverable amount’. If an asset’s recoverable amount falls below its carrying amount, the difference must be recognised in profit or loss (or OCI for revalued assets), known as an impairment loss (IAS 36.60).

IAS 36 is applicable to most assets, including:

  • Property, plant and equipment,
  • Intangible assets,
  • Right-of-use assets,
  • Investment properties carried at cost, and
  • Investments in subsidiaries, associates and joint ventures.

However, IAS 36’s scope excludes several asset types defined in IAS 36.2-4, which are either carried at fair value or addressed by other IFRSs to ensure their carrying amount doesn’t exceed expected economic benefits. These exemptions include:

  • Financial assets within the scope of IFRS 9,
  • Inventories (IAS 2),
  • Contract assets and contract costs (IFRS 15),
  • Deferred tax assets (IAS 12),
  • Assets classified as held for sale under IFRS 5,
  • Assets arising from employee benefits (IAS 19),
  • Investment property measured at fair value (IAS 40),
  • Biological assets related to agricultural activity measured at fair value less costs to sell under IAS 41, and
  • Insurance contracts (IFRS 17).

While IAS 36 usually discusses individual assets, its rules are also applicable to cash-generating units (CGUs).

Timing of impairment tests

IAS 36 mandates companies to evaluate whether there’s any indication of asset impairment at every reporting date (IAS 36.9). Entities must consider various indicators. External signs include a noticeable decrease in an asset’s market value beyond expected wear and tear. Significant adverse changes in technology, market conditions, economic or legal environment, or an increase in market interest rates affecting discount rates used in asset valuation, must also be assessed.

Internally, signs such as obsolescence, physical damage, substantial reductions in asset usage or future applications, assets becoming idle, discontinuation or restructuring of operations, or early disposal plans must be considered. If financial reports suggest underperformance, or dividends from investments surpass accumulated profits, these could signal a need for impairment review (IAS 36.12-17).

Goodwill and intangible assets with an indefinite useful life or not yet in use must undergo annual impairment tests regardless of impairment indicators (IAS 36.10, 90). These tests can occur anytime in the financial year but must be consistent annually. Although different CGUs can be tested at different times, it is common practice to conduct tests towards the financial year-end (IAS 36.96-98). A change in the timing of the annual goodwill impairment test is a change in accounting policy, typically not applied retrospectively to avoid hindsight bias in assumptions and estimates. If the interval between tests exceeds 12 months, entities should consider conducting two tests in the transition year, especially when interim reports are issued—though IAS 36 does not address this specifically.

Furthermore, under IAS 36.99, entities may base the current year’s impairment test on the prior year’s calculations if there have been no significant changes in the CGU’s composition, the previous test indicated a significant buffer, and the probability of an impairment loss is deemed low.


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Recoverable amount

The recoverable amount is the greater of an asset’s (IAS 36.6):

The fair value is determined in accordance with IFRS 13, while the ‘costs of disposal’ that diminish it comprise incremental expenses directly attributable to the asset’s sale, such as legal fees and transaction taxes. However, costs like termination benefits or business reorganisation post-disposal are not included (IAS 36.28-29).

It’s important to highlight that the recoverable amount can be based on FVLCD even if there is no intent to sell the asset. Nevertheless, IAS 36.20 recognises situations where estimating fair value is not feasible, making the ViU the only method for determining recoverable amount.

There is no need to calculate both FVLCD and ViU every time. If either amount exceeds the asset’s carrying amount, this indicates no impairment, and there is no necessity to determine the other value. IAS 36.23 suggests using shortcuts for calculations in clear-cut cases where recoverable amount surpasses the carrying amount.

Reversing impairment losses

At each reporting date, entities must evaluate if impairment losses recognised in past periods may need to be reversed or reduced. IAS 36.111 provides a list of indicators for this assessment, mirroring the ones in IAS 36.12, but excluding the comparison of the net assets’ book value to the company’s market capitalisation indicated in IAS 36.12(d).

An impairment reversal must stem from revised estimates used in determining the recoverable amount, such as changes in cash flows or discount rates. Impairment losses cannot be reversed merely due to the passage of time or asset depreciation (IAS 36.114-116).

An asset’s book value increase due to an impairment loss reversal must not exceed what it would have been, accounting for depreciation or amortisation, if no impairment loss had been recognised previously (IAS 36.117-118). An impairment loss reversal is immediately recognised in profit or loss unless the asset is revalued according to another IFRS, like IAS 16’s revaluation model. Here, any reversal is treated as a revaluation increase. Post-reversal, the asset’s depreciation expense must be recalibrated to spread the revised book value (minus residual value) over its remaining useful life (IAS 36.119-121).

For CGUs, the reversal is distributed proportionally across individual assets, ensuring that the revised carrying amount does not surpass the recoverable amount or the estimated book value without the previous impairment (IAS 36.122-123). It’s crucial to remember, however, that impairment losses on goodwill are not reversible (IAS 36.124-125 and IFRIC 10).

Accounting for reversal of an impairment loss is illustrated in Example 4 accompanying IAS 36.

More about IAS 36

See other pages relating to IAS 36:

Cash-Generating Units (CGUs)
Value in Use as the Recoverable Amount
Impairment of Assets: Disclosure

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