IAS 36, formally International Accounting Standard 36 Impairment of Assets, makes sure no asset sits on the balance sheet above the amount the business can actually recover from it. Depreciation spreads cost over a life on a schedule decided years ago. IAS 36 covers the moment reality moves away from that schedule, when a machine becomes obsolete, a market collapses or an acquisition underperforms. This guide covers which assets the standard applies to, the indicators that trigger a test, how to calculate value in use step by step, how impairment is allocated across a cash-generating unit, when it can be reversed, and how the rules differ from US GAAP. Every step comes with a worked example and journal entry.
What Is IAS 36? Objective and Scope
The objective of IAS 36 is simple to state: an asset must not be carried at more than its recoverable amount. If it is, the excess is an impairment loss, recognised straight away.
The standard applies to most non-current, non-financial assets, including:
- Property, plant and equipment under IAS 16, whether carried at cost or under the revaluation model
- Intangible assets under IAS 38, and goodwill acquired in a business combination under IFRS 3
- Right-of-use assets recognised under IFRS 16
- Investment property carried at cost
- Investments in subsidiaries, associates and joint ventures (in separate financial statements, and equity-accounted investments tested as a whole)
Several assets are excluded, because another standard already has its own measurement rule for them:
| Excluded asset | Governed by |
|---|---|
| Inventories | IAS 2 (lower of cost and net realisable value) |
| Contract assets and contract costs | IFRS 15 |
| Deferred tax assets | IAS 12 |
| Employee benefit assets | IAS 19 |
| Financial assets within IFRS 9 | IFRS 9 (expected credit losses) |
| Investment property at fair value | IAS 40 |
| Biological assets at fair value less costs to sell | IAS 41 |
| Non-current assets held for sale | IFRS 5 |
The exclusions matter in exam questions. If inventory has fallen in value, the answer is a net realisable value write-down under IAS 2, not an IAS 36 impairment test.
The Core Rule: Carrying Amount vs Recoverable Amount
An asset is impaired when its carrying amount exceeds its recoverable amount. The impairment loss is the difference.
Recoverable amount is the higher of:
- Fair value less costs of disposal (FVLCD): the price that would be received to sell the asset in an orderly transaction between market participants, less the incremental costs of disposing of it (legal fees, stamp duty, removal costs). Finance costs and income tax are not costs of disposal.
- Value in use (VIU): the present value of the future cash flows expected from continuing to use the asset and from its eventual disposal.
Higher, not lower. A rational business will either keep using the asset or sell it, whichever leaves it better off, so the asset is worth at least the better of the two options. Students invert this rule more often than any other in the standard.
Two shortcuts follow. If either measure already exceeds the carrying amount, there is no impairment and the other measure does not need to be calculated. And if there is no reason to believe value in use is materially higher than FVLCD (for an asset held for disposal, for example), FVLCD can be used as the recoverable amount.
The loss goes to profit or loss. The one exception is an asset carried under the IAS 16 revaluation model: there the loss is treated as a revaluation decrease, charged first against any revaluation surplus in other comprehensive income for that asset, with only the excess going to profit or loss.
Impairment Indicators: Signs an Asset May Be Impaired
At the end of each reporting period, an entity must assess whether there is any indication that an asset may be impaired. If there is, recoverable amount is estimated. If there is not, no calculation is needed (apart from the annual tests below). IAS 36 groups the indicators into external and internal sources:
| External indicators | Internal indicators |
|---|---|
| The asset's market value has fallen significantly more than expected from the passage of time or normal use | Evidence of obsolescence or physical damage |
| Significant adverse changes in the technological, market, economic or legal environment | Significant adverse changes in how the asset is used: idle capacity, plans to discontinue or restructure the operation, or plans to dispose of the asset early |
| Market interest rates have risen, raising the discount rate used in value in use | Reassessing an indefinite useful life as finite |
| The carrying amount of the entity's net assets exceeds its market capitalisation | Internal reports show economic performance is, or will be, worse than expected (cash flows, operating profit or budgets) |
The list is not exhaustive. An indicator that does not lead to an impairment may still mean the asset's remaining useful life, depreciation method or residual value needs reviewing.
When to Test for Impairment
Most assets are tested only when an indicator is present. Three are tested annually regardless of indicators:
- Goodwill acquired in a business combination
- Intangible assets with an indefinite useful life
- Intangible assets not yet available for use
The common thread is that none of these is being systematically amortised, so nothing else would ever catch a decline in value. The annual test can be performed at any time during the year, provided it happens at the same time every year. Goodwill and intangibles that were first recognised during the current year must be tested before the year ends.
How to Calculate Value in Use Under IAS 36
Value in use causes the most difficulty, because it is a discounted cash flow model with rules about what may go into it. There are four steps.
Step 1: Project the cash flows
- Base the projections on the most recent budgets or forecasts approved by management, using reasonable and supportable assumptions.
- Cover a maximum of five years, unless a longer period can be justified.
- Estimate the cash flows for the asset in its current condition. Leave out the benefits of future restructurings the entity is not yet committed to, and of improvements or enhancements that would raise the asset's performance.
- Leave out financing cash flows (interest, loan repayments) and income tax receipts or payments.
- Include the net cash flow expected from disposing of the asset at the end of its useful life.
Step 2: Choose the discount rate
Use a pre-tax rate that reflects the time value of money and the risks specific to the asset, unless those risks have already been built into the cash flows. Counting the same risk twice, in the cash flows and again in the rate, is a common error. In practice the rate is often derived from the entity's weighted average cost of capital and adjusted to a pre-tax basis.
Step 3: Add a terminal value where the horizon is indefinite
A single machine with a five-year remaining life needs no terminal value: its cash flows simply stop. A cash-generating unit carrying goodwill has no fixed end date, so the cash flows after the forecast period are captured with a terminal value. They are extrapolated at a steady or declining growth rate that should not exceed the long-term average growth rate for the products, industry or country concerned.
Step 4: Discount and add up
Worked example. A packaging machine has a carrying amount of $450,000 at 31 December 2026 and five years of remaining life. Management's approved forecast gives the net cash inflows below. The pre-tax discount rate is 10% (discount factors rounded to four decimals).
| Year | Net cash inflow | Discount factor at 10% | Present value |
|---|---|---|---|
| 2027 | $120,000 | 0.9091 | $109,092 |
| 2028 | $110,000 | 0.8264 | $90,904 |
| 2029 | $100,000 | 0.7513 | $75,130 |
| 2030 | $90,000 | 0.6830 | $61,470 |
| 2031 | $85,000 | 0.6209 | $52,777 |
| Value in use | $389,373 | ||
Terminal value illustration. For a cash-generating unit with an indefinite horizon, suppose year 5 cash flow is $200,000, long-term growth is 2% and the discount rate is 10%. The terminal value at the end of year 5 is $200,000 × 1.02 ÷ (0.10 − 0.02) = $2,550,000, and its present value is $2,550,000 × 0.6209 = $1,583,295. The terminal value often makes up most of a CGU's value in use. That is why IAS 36 asks for sensitivity disclosures on the growth and discount rates.
Worked Example: Impairment of a Single Asset
Continuing with the packaging machine, which cost $720,000 on 1 January 2024 and is depreciated straight-line over eight years with no residual value ($90,000 a year). A technological shift is an external impairment indicator, so the company tests it at 31 December 2026:
- Carrying amount: $720,000 − (3 × $90,000) = $450,000
- Fair value less costs of disposal: $375,000 fair value − $15,000 costs of disposal = $360,000
- Value in use (from the table above): $389,373
Recoverable amount = the higher of the two = $389,373
Impairment loss = $450,000 − $389,373 = $60,627
Journal entry at 31 December 2026:
| Account | Debit | Credit |
|---|---|---|
| Impairment Loss (profit or loss) | $60,627 | |
| Accumulated Impairment Losses (Machinery) | $60,627 |
If you took the lower figure by mistake, you would write the machine down to $360,000 and book a $90,000 loss, overstating the impairment by $29,373.
From 2027, depreciation is based on the new carrying amount over the remaining five years: $389,373 ÷ 5 = $77,875 a year, down from $90,000. Practise posting entries like these in the journal entry challenges.
Cash-Generating Units, Corporate Assets and Goodwill
Value in use often can't be measured for a single asset, because the asset does not generate cash on its own. A conveyor belt in a factory has no revenue of its own. In that case the asset is tested as part of its cash-generating unit (CGU): the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or groups of assets. CGUs must be identified consistently from period to period.
Corporate assets such as a head office building or a shared IT system don't generate independent cash inflows either. Where a reasonable and consistent basis exists, a share of their carrying amount is allocated to each CGU. Where it doesn't, the CGU is first tested without them, and then the smallest group of CGUs to which the corporate asset can be allocated is tested.
Goodwill is allocated to the CGU or group of CGUs expected to benefit from the synergies of the business combination. That group must be the lowest level at which management monitors goodwill internally, and no larger than an operating segment under IFRS 8.
When a CGU is impaired, IAS 36 sets a strict allocation order:
- First, reduce the carrying amount of any goodwill allocated to the CGU.
- Then allocate the remainder to the other assets in the unit pro rata on their carrying amounts.
There is a floor on step 2: no individual asset may be reduced below the highest of its own FVLCD, its own value in use (if measurable) and zero. Any loss that can't be allocated because of the floor is spread pro rata over the other assets in the unit.
Worked Example: Impairment of a Cash-Generating Unit
A CGU has a carrying amount of $1,000,000: goodwill $150,000, buildings $500,000 and equipment $350,000. Its recoverable amount is $820,000. The buildings have a fair value less costs of disposal of $490,000. The equipment's FVLCD can't be measured reliably.
Impairment loss = $1,000,000 − $820,000 = $180,000
Step 1: Goodwill. Write off in full: $150,000, leaving $0. Remaining loss: $30,000.
Step 2: Pro rata on the other assets (the base excludes goodwill, which has already absorbed its share):
- Buildings: $30,000 × 500/850 = $17,647, which would take them to $482,353
- Equipment: $30,000 × 350/850 = $12,353
Step 3: Apply the floor. The buildings can't go below their $490,000 FVLCD, so they absorb only $10,000. The $7,647 that can't be allocated to them goes to the equipment, whose total write-down becomes $20,000.
| Asset | Before | Impairment | After |
|---|---|---|---|
| Goodwill | $150,000 | ($150,000) | $0 |
| Buildings | $500,000 | ($10,000) | $490,000 |
| Equipment | $350,000 | ($20,000) | $330,000 |
| Total | $1,000,000 | ($180,000) | $820,000 |
Journal entry:
| Account | Debit | Credit |
|---|---|---|
| Impairment Loss (profit or loss) | $180,000 | |
| Goodwill | $150,000 | |
| Accumulated Impairment Losses (Buildings) | $10,000 | |
| Accumulated Impairment Losses (Equipment) | $20,000 |
Reversing an Impairment Loss Under IAS 36
At each reporting date the entity also looks for indications that an earlier impairment loss has decreased, essentially the indicators above in reverse. If recoverable amount has risen because the estimates used to measure it have changed, the loss is reversed. A rise that comes purely from the passage of time (the unwinding of the discount) is not a reversal.
The reversal has a ceiling: the new carrying amount may not exceed the carrying amount that would have been determined, net of depreciation, had no impairment ever been recognised.
Worked example. Return to the packaging machine. At 31 December 2028, two years after the impairment, the technology problem has been resolved and recoverable amount is re-estimated at $300,000.
- Actual carrying amount: $389,373 − (2 × $77,875) = $233,623
- "Would have been" carrying amount with no impairment: $450,000 − (2 × $90,000) = $270,000
- New recoverable amount: $300,000, but the cap is $270,000
Reversal = $270,000 − $233,623 = $36,377, not the $66,377 that comparing with the recoverable amount would suggest.
| Account | Debit | Credit |
|---|---|---|
| Accumulated Impairment Losses (Machinery) | $36,377 | |
| Reversal of Impairment Loss (profit or loss) | $36,377 |
Depreciation for the remaining three years goes back to $270,000 ÷ 3 = $90,000 a year, exactly the original path. For a revalued asset, the reversal goes to profit or loss to the extent it reverses a loss previously recognised there, and any excess is a revaluation increase in other comprehensive income.
Why goodwill is never reversed. An impairment loss on goodwill can never be reversed, not even in a later interim period. Any later recovery in the CGU's value is most likely internally generated goodwill rather than a return of the goodwill that was purchased, and IAS 38 forbids recognising internally generated goodwill. Writing it back would put a self-created asset onto the balance sheet.
IAS 36 vs US GAAP: Key Differences in Impairment of Assets
Impairment is one of the clearest differences between the two frameworks. US GAAP spreads the rules across ASC 360 (long-lived assets) and ASC 350 (goodwill and intangibles):
| Area | IAS 36 (IFRS) | US GAAP |
|---|---|---|
| Impairment test for assets held and used | One step: compare carrying amount with recoverable amount | Two steps: a recoverability test against undiscounted cash flows; only if that fails, write down to fair value |
| Measure of the write-down | Recoverable amount (higher of FVLCD and value in use) | Fair value |
| Level of goodwill testing | CGU or group of CGUs, no larger than an operating segment | Reporting unit (an operating segment or one level below) |
| Goodwill test | Compare the CGU's carrying amount (including goodwill) with its recoverable amount | Compare the reporting unit's carrying amount with its fair value; the loss is capped at the goodwill balance. An optional qualitative screen comes first |
| Reversal of impairment | Required when estimates change (except goodwill), up to the "would have been" amount | Prohibited for assets held and used, and for goodwill |
Because of the undiscounted recoverability test, an asset can be impaired under IFRS while passing the US GAAP test for the same facts. Our IFRS vs US GAAP comparison covers the other major differences.
IAS 36 Disclosure Requirements
A summary of what the notes must show:
- For each class of assets: impairment losses and reversals recognised in profit or loss and in other comprehensive income, and the line items that include them.
- For each material impairment loss or reversal: the events and circumstances that caused it, the amount, the asset or CGU affected, and whether recoverable amount is FVLCD or value in use (with the discount rate used).
- For each CGU carrying significant goodwill or indefinite-life intangibles: the carrying amount allocated, the key assumptions, the projection period, the growth rate used to extrapolate beyond it, and the discount rate.
- A sensitivity disclosure where a reasonably possible change in a key assumption would cause the carrying amount to exceed recoverable amount.
Common IAS 36 mistakes
- Taking the lower of FVLCD and value in use. Recoverable amount is the higher. This costs more marks than any other single error in the standard.
- Including financing or tax cash flows in value in use, or the benefit of an uncommitted restructuring.
- Allocating a CGU loss pro rata across everything, including goodwill. Goodwill goes first and in full, then pro rata on the rest, subject to each asset's floor.
- Forgetting to reset depreciation after impairment. The revised carrying amount is depreciated over the remaining life.
- Reversing above the "would have been" carrying amount. The cap is the depreciated original carrying amount, not the original cost and not the new recoverable amount.
- Reversing a goodwill impairment. Never permitted.
- Testing goodwill only when there is an indicator. Goodwill, indefinite-life intangibles and intangibles not yet in use are tested annually regardless.
Frequently Asked Questions
What is recoverable amount under IAS 36?
Recoverable amount is the higher of an asset's fair value less costs of disposal and its value in use. It is what the business could recover by selling the asset or by keeping and using it, whichever is better. If the carrying amount exceeds recoverable amount, the difference is an impairment loss.
Is goodwill impairment reversible?
No. IAS 36 prohibits reversing an impairment loss on goodwill, even when the cash-generating unit's value later recovers. The recovery is treated as internally generated goodwill, which IAS 38 does not allow on the balance sheet. Losses on other assets can be reversed, up to the carrying amount they would have had without impairment.
How often must impairment be tested?
An entity looks for impairment indicators at the end of every reporting period, and calculates recoverable amount only when an indicator exists. Goodwill, intangible assets with an indefinite useful life and intangibles not yet available for use are tested every year whether or not there is an indicator.
What is a cash-generating unit?
A cash-generating unit is the smallest identifiable group of assets that produces cash inflows largely independent of the cash inflows from other assets. It is used when a single asset, such as a conveyor belt, has no independent cash flows. A shop, a production line or a branch is often a CGU.
What is the difference between value in use and fair value less costs of disposal?
Value in use is entity-specific: the present value of the cash flows the business expects from continuing to use the asset. Fair value less costs of disposal is market-based: what a market participant would pay for the asset, less the costs of selling it. Recoverable amount is the higher of the two.
Does depreciation change after impairment?
Yes. After an impairment loss, depreciation is recalculated on the reduced carrying amount, less any residual value, over the asset's remaining useful life. A machine written down to $389,373 with five years left is depreciated at $77,875 a year, rather than the original $90,000.
Practise IAS 36 Impairment
Impairment questions almost always hinge on two decisions: which recoverable amount to take, and how to allocate a loss across a cash-generating unit. Once those are right, the arithmetic is straightforward. Accountely's impairment of assets practice problems score the recoverable amount decision separately from the allocation, so you can see which half you are losing marks on. If an indefinite-life intangible triggered the test, our IAS 38 guide explains why those assets are never amortised. For the full text of the standard, see the official IAS 36 page at the IFRS Foundation, and for background on the concept, the impaired asset entry on Wikipedia.