The carrying amount of assets in the statement of financial position should not be higher than the economic benefits expected to be derived from them. The amount of economic benefits is the recoverable amount as per IAS 36 terminology. Recoverable amount is the higher of an asset’s fair value less costs of disposal and its value in use (IAS 36.6). If the carrying amount is higher than the recoverable amount, the asset is impaired, i.e. entities need to decrease the value of the asset through recognition of an impairment loss.
Fair value less costs of disposal is the fair value less incremental costs directly attributable to the disposal of an asset (see IAS 36.28-29). It is important to note that fair value less costs of disposal may be used as a basis for recoverable amount even if the entity does not intend to sell the asset. Fair value measurements are covered in IFRS 13. Value in use of covered on a separate page.
IAS 36 requires entities to assess at the end of each reporting period whether an asset may be impaired (IAS 36.9) and provides a list of minimum impairment indicators to be considered (see paragraphs IAS 36.12-17). Irrespective of existence of any impairment indicators, goodwill and intangible assets with an indefinite useful life or not yet available for use must be tested for impairment at least annually (IAS 36.10).
IAS 36 is applicable to majority of non-current assets, however there are a few groups that are excluded from the scope of IAS 36 because other IFRS already give sufficient guidance. Those assets are listed and discussed in paragraphs IAS 36.2-5.
IAS 36 most often uses the term ‘an asset’, but this applies also to cash-generating units (‘CGU’). The same approach is adopted on this website.
Paragraphs IAS 36.88-99 set out the criteria for timing of impairment tests. Goodwill and intangible assets with an indefinite useful life or not yet available for use must be tested for impairment at least annually (IAS 36.10). Impairment test may be performed at any time during the year, at the same time every year. In practice, impairment tests are performed near year-end. Assets are tested for impairment in the following order:
- individual assets.
- individual CGUs.
- groups of CGUs to which goodwill has been allocated.
Individual assets and CGUs without goodwill are tested whenever there are impairment indicators. The requirement for annual testing applies to goodwill only (and intangible assets with an indefinite useful life or not yet available for use). Additionally, IAS 36.99 allows using calculation from previous year to perform current year impairment test, provided that the criteria listed in this paragraph are met.
See also the example on allocation of impairment loss.
Read more about IAS 36:
Scope of IAS 36 Impairment of Assets
IAS 36 Impairment of Assets: Cash-Generating Units (CGU)
IAS 36 Impairment of Assets: Value in Use as the Recoverable Amount
IAS 36 Impairment of Assets: Allocation and Reversal of Impairment Losses
IAS 36 Impairment of Assets: Disclosure