IAS 36 - Impairment of Assets

Scope & Objective

Objective: IAS 36 ensures that assets are carried at no more than their recoverable amount, and to define how recoverable amount is calculated.

• Applies to all assets except:
  • Inventories (IAS 2)
  • Construction contracts (IAS 11)
  • Deferred tax assets (IAS 12)
  • Employee benefit assets (IAS 19)
  • Financial assets (IFRS 9)
  • Investment property measured at fair value (IAS 40)
  • Biological assets measured at fair value (IAS 41)
  • Assets arising from insurance contracts (IFRS 4)
  • Non-current assets held for sale (IFRS 5)
• Key principle: Asset's carrying amount should not exceed its recoverable amount

Key Definitions

Impairment Loss: The amount by which the carrying amount of an asset exceeds its recoverable amount.

Carrying Amount: The amount at which an asset is recognized in the balance sheet after deducting accumulated depreciation and impairment losses.

Recoverable Amount: The higher of an asset's fair value less costs of disposal and its value in use.

Value in Use: The present value of the future cash flows expected to be derived from an asset or cash-generating unit.

Cash-Generating Unit (CGU): The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

Impairment Recognition

Required Assessment: At each reporting date, assess whether there is any indication that an asset may be impaired.

External Indicators	Internal Indicators
Significant decline in market value Adverse changes in technology, markets, economy, or laws Increase in market interest rates Net assets of the entity higher than market capitalization	Evidence of obsolescence or physical damage Asset is part of restructuring or held for disposal Worse economic performance than expected Significant changes in how asset is used

Mandatory Testing: Regardless of indicators, test the following annually:

• Intangible assets with indefinite useful lives
• Intangible assets not yet available for use
• Goodwill acquired in a business combination

Measuring Recoverable Amount

Recoverable Amount: Higher of:

• Fair Value Less Costs of Disposal (FVLCD)
• Value in Use (VIU)

Component	Definition
Fair Value Less Costs of Disposal	Price in orderly transaction between market participants Less costs of disposal (legal costs, stamp duty, transaction tax) Excludes restructuring costs
Value in Use	Present value of future cash flows Based on reasonable and supportable assumptions Reflects current market expectations Excludes future restructuring or improvements

Cash-Generating Units

CGU Identification: If it's not possible to estimate recoverable amount for an individual asset, determine recoverable amount for the asset's CGU.

CGU Identification Factors:

• How management monitors operations
• How management makes decisions about continuing or disposing of assets
• Independence of cash inflows

Goodwill Allocation: Goodwill acquired in a business combination must be allocated to each of the acquirer's CGUs expected to benefit from the synergies.

CGU Example:

Scenario: Company operates a chain of retail stores

• Each store's cash inflows can be individually measured

• Management makes decisions about individual store performance

• Each store is a separate CGU

Exception: If stores share centralized marketing, purchasing, or management, they may form a larger CGU

Impairment Recognition & Measurement

Impairment Loss: Recognize when carrying amount exceeds recoverable amount. Measure as the difference.

Asset Type	Accounting Treatment
Individual Asset	Recognize impairment loss immediately in profit or loss Reduce carrying amount of asset Adjust depreciation for future periods
CGU (excluding goodwill)	Allocate impairment loss to assets pro rata based on carrying amounts Do not reduce carrying amount below highest of: Fair value less costs of disposal Value in use Zero
CGU (with goodwill)	Allocate impairment loss first to goodwill Then allocate remaining loss to other assets pro rata Same limitation on reduction as above

Impairment Calculation Example:

Scenario: CGU with carrying amount of $1,000,000

• Recoverable amount: $800,000

• Impairment loss: $200,000

Allocation:

Goodwill: $50,000 → Reduce to $0

Remaining loss: $150,000 allocated to other assets proportionally

Reversal of Impairment Loss

Reversal Conditions: Assess at each reporting date whether there is any indication that an impairment loss may have decreased or no longer exists.

Asset Type	Reversal Treatment
Assets other than Goodwill	Reverse impairment loss if recoverable amount increases Increase carrying amount but not above what depreciated carrying amount would have been without impairment Recognize reversal in profit or loss
Goodwill	Impairment loss for goodwill cannot be reversed Once recognized, impairment loss for goodwill is permanent

Important: Reversal of impairment loss is not a revaluation. It's a correction of previous impairment recognition.

Disclosure Requirements

Comprehensive Disclosures: Entities must disclose information that enables users to understand the effects of impairment on financial position and performance.

For Each Impairment	For CGUs with Goodwill/Indefinite-lived Intangibles
Events and circumstances leading to impairment Amount of impairment loss Nature of asset and reportable segment If recoverable amount is fair value or value in use If fair value, the valuation method and key assumptions If value in use, the discount rate used	Description of CGU Carrying amount of goodwill and other assets Basis for determining recoverable amount Key assumptions used and sensitivity analysis Comparison of carrying amount and recoverable amount

Summary

Objective: Ensure an asset's carrying amount does not exceed its recoverable amount.

Impairment Indicators

• Technical or market-related obsolescence
• Legal or regulatory changes
• Interest rate increases
• Physical damage or frequent repairs

Recoverable Amount

The higher of:

• Fair Value Less Costs of Disposal (FVLCD)
• Value in Use (Present Value of Future Cash Flows)

Impairment Loss

Recognized if the Carrying Amount > Recoverable Amount.

Annual Impairment Test (Mandatory)

Required regardless of indicators for:

1. Intangible assets with an indefinite useful life
2. Intangible assets not yet ready for use (e.g., R&D)
3. Goodwill

Cash-Generating Unit (CGU)

Definition: The smallest identifiable group of assets that generates independent cash inflows.

Allocation of Impairment Loss (for a CGU)

1. First obviously, then reduce any goodwill allocated to the CGU
2. Then, to the other assets of the CGU on a pro-rata basis

Example of Impairment Allocation

Asset	Carrying Amount	Impairment Loss	New Carrying Amount
Building	$10,000	$1,666.67	$8,333.33
Trucks	$25,000	$5,000	$20,000
Goodwill	$10,000	$10,000	$0
Total	$45,000	$16,666.67	$28,333.33