IAS 36 – Impairment of Assets ( summary with examples )

Objective

IAS 36 ensures that assets are not carried at more than their recoverable amount.
If an asset’s carrying amount exceeds its recoverable amount, the asset is impaired — and an impairment loss must be recognized.

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🧾 1. Scope

IAS 36 applies to most non-financial assets, including:
✅ Property, Plant and Equipment (IAS 16)
✅ Intangible Assets (IAS 38)
✅ Goodwill (IFRS 3)
✅ Right-of-use assets (IFRS 16)
✅ Investment Property (only if cost model under IAS 40)

❌ Does not apply to:

• Inventories (IAS 2)

• Deferred tax assets (IAS 12)

• Financial instruments (IFRS 9)

• Biological assets (IAS 41)

• Investment property (fair value model)

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⚙️ 2. Key Concepts

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🔍 3. When to Test for Impairment

A. Annual Test Required For:

• Goodwill

• Intangible assets with indefinite useful lives

• Intangible assets not yet available for use

B. Other Assets:

Test only when there is an indication that the asset may be impaired.

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🚨 4. Indicators of Impairment

External Indicators:

• Market value declines significantly

• Adverse changes in legal, economic, or technological environment

• Increase in market interest rates (reduces recoverable amount)

Internal Indicators:

• Obsolescence or physical damage

• Asset underperforms compared to expectations

• Reorganization or discontinuance of operations

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📉 5. Measurement of Recoverable Amount

A. Fair Value less Costs of Disposal (FV–CTS):

• Price from a market transaction minus selling costs.

• Example: Selling an old machine through a dealer after deducting commission.

B. Value in Use (VIU):

• Present value of expected future cash flows from the asset’s use and disposal.

• Requires estimation of:

  • Future cash inflows/outflows

  • Discount rate (pre-tax)

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💰 6. Example 1 – Simple Impairment Test

Scenario:

• Machine cost = $100,000

• Accumulated depreciation = $40,000 → Carrying amount = $60,000

• Fair value less costs to sell = $50,000

• Value in use = $55,000

👉 Recoverable amount = higher of FV–CTS ($50,000) and VIU ($55,000)
= $55,000

Since carrying amount ($60,000) > recoverable amount ($55,000):
Impairment loss = $5,000

Journal entry:

Asset is carried at $55,000 after impairment.

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🏢 7. Cash-Generating Units (CGUs)

If an individual asset does not generate independent cash flows, test the smallest identifiable group of assets that does — called a Cash-Generating Unit (CGU).

Example of CGUs: a factory line, a retail store, or a division.

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Example 2 – CGU Impairment

• Carrying amounts:

  • Building: $500,000

  • Machinery: $300,000

  • Inventory: $200,000

  • Goodwill: $100,000

  • Total = $1,100,000

• Recoverable amount of CGU = $1,000,000

👉 Impairment loss = $100,000

Allocation:

1. First to goodwill → reduce to zero ($100,000).

2. If further loss, allocate to other assets pro rata.

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🔄 8. Reversal of Impairment

• Reversal is allowed if circumstances change (except for goodwill).

• New carrying amount cannot exceed what it would have been if no impairment had occurred.

Example:
Machine impaired to $55,000 last year.
Recoverable amount now $65,000 → increase by $10,000.

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🧮 9. Goodwill Impairment (Special Rule)

• Tested annually and cannot be reversed once impaired.

• Allocated to CGUs or groups of CGUs that benefit from the acquisition.

• Any impairment loss → charged directly to profit or loss.

Example:
Goodwill $200,000 allocated to a CGU with recoverable amount $1,000,000 and carrying amount (including goodwill) $1,100,000.
→ Impairment loss = $100,000 → reduce goodwill to $100,000.

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📊 10. Disclosure Requirements

Entities must disclose:

• Amount of impairment losses and reversals recognized in profit or loss and in other comprehensive income.

• Events and circumstances leading to impairment.

• Method and assumptions used to estimate recoverable amount.

• For CGUs, show allocation of goodwill and major assets.

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🧱 11. Summary Table

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🧠 12. Quick Example Summary

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⚖️ 13. Key Differences from Other Standards