IAS 36 Impairment of Assets: Recoverable Amount, CGUs, Reversals

IAS 36, the IFRS standard on impairment of assets, requires companies to keep long-lived assets on the balance sheet at no more than the amount they can recover through use or sale. When the carrying amount exceeds the recoverable amount, the company writes the asset down and records the difference as a loss. The rule exists so that financial statements do not overstate what a company actually owns.¹

Which Assets the Standard Covers

IAS 36 applies to most long-term tangible and intangible assets a company holds for ongoing use: land, buildings, machinery, patents, trademarks, and similar items. It also covers investment property carried at cost under IAS 40, goodwill from business combinations, and right-of-use assets under lease arrangements.²

Several asset categories sit outside the standard because other IFRSs handle their valuation:

Inventories, which follow IAS 2’s lower-of-cost-or-net-realizable-value rule.
Contract assets from customer contracts under IFRS 15.³
Deferred tax assets under IAS 12.
Financial assets under IFRS 9, which uses expected credit loss models and fair value measurement.
Investment property carried at fair value under IAS 40, since it is already remeasured each period.
Biological assets carried at fair value less costs to sell under IAS 41.¹
Non-current assets classified as held for sale under IFRS 5.

When to Test for Impairment

At each reporting date, a company must check for signs that an asset’s carrying amount may no longer be recoverable. The standard groups those signs into external and internal indicators.

External Indicators

The most obvious trigger is a significant drop in an asset’s market price beyond what normal use or aging would explain. Adverse changes in the legal or regulatory environment, rising interest rates, and technological changes that make equipment or processes less competitive also count.⁴

One indicator often catches listed companies off guard: when the carrying amount of the company’s net assets exceeds its market capitalization, that gap signals potential impairment at the entity level. It does not automatically mean every asset is impaired, but the company must investigate.⁴

Internal Indicators

Physical damage, obsolescence, and changes in how the company plans to use an asset all serve as internal triggers. Deciding to discontinue a product line, restructure a division, or dispose of an asset earlier than planned each require a closer look. Management reports showing an asset’s economic performance falling short of projections also demand attention.⁴

Assets Tested Every Year Regardless

Three categories skip the indicator step entirely and must be tested annually whether or not anything looks wrong:

Goodwill acquired in a business combination.
Intangible assets with indefinite useful lives.
Intangible assets not yet available for use, because future benefits are harder to predict before the asset is operational.²

The annual test can be performed at any time during the reporting period, provided the timing stays consistent year to year. Different intangible assets can be tested at different times, but any intangible asset first recognized during the current period must be tested before that period closes.

How the Recoverable Amount Is Calculated

The recoverable amount is the higher of two figures: fair value less costs of disposal, and value in use. If either figure exceeds the carrying amount, the asset is not impaired and there is no need to calculate the other.⁴

Fair Value Less Costs of Disposal

This is the price the asset would fetch in an orderly sale between willing parties, minus the direct costs of making that sale happen. Disposal costs include legal fees, stamp duties, and costs of getting the asset into sellable condition. Brokerage commissions count; restructuring charges and overhead do not.⁴

Value in Use

Value in use is the present value of the cash flows the company expects to generate by continuing to use the asset and eventually disposing of it. The calculation has several moving parts.

Cash flow projections come from approved budgets or forecasts covering a maximum of five years, unless a longer period can be justified.² Cash flows beyond that period are extrapolated using a steady or declining growth rate; an increasing rate is only acceptable if the company can justify it.

The discount rate must be a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset. In practice, most companies start from a weighted average cost of capital and adjust for asset-specific risks, stripping out any risks already captured in the cash flow estimates.⁵ The discount rate is where most of the judgment sits, and auditors scrutinize it closely. Small changes can swing the outcome from no impairment to a material write-down.

Recording the Loss

When the carrying amount exceeds the recoverable amount, the company reduces the asset to the recoverable amount and records the difference as a loss in the current period. Future depreciation or amortization is then recalculated based on the new, lower carrying amount over the asset’s remaining useful life.⁴

For assets carried at historical cost, the loss goes straight to profit or loss. For assets previously revalued upward under IAS 16 or IAS 38, the loss first reduces any existing revaluation surplus in other comprehensive income, and only the portion that exceeds that surplus hits profit or loss.⁴

Cash-Generating Units and the Allocation Order

Many assets do not produce cash flows on their own. A single piece of factory equipment, for example, generates revenue only in combination with the rest of the production line. IAS 36 handles this by grouping such assets into a cash-generating unit, defined as the smallest identifiable group of assets whose cash inflows are largely independent of those from other assets.⁴

When a CGU’s carrying amount exceeds its recoverable amount, the loss is allocated in a strict order. Goodwill allocated to the unit absorbs the loss first.¹ Any remaining loss is spread across the other assets in the unit based on their relative carrying amounts.

A floor protects individual assets during this allocation. No asset can be reduced below the highest of its own fair value less costs of disposal, its own value in use, or zero. When that floor blocks a full allocation to one asset, the excess is redistributed proportionally among the other assets in the unit.⁴

Corporate assets such as a headquarters building or shared research center serve multiple CGUs but generate no cash flows on their own. Where a reasonable and consistent allocation basis exists, a portion of the corporate asset is included in each CGU’s carrying amount before testing. Where no such basis exists, the corporate asset is tested as part of the smallest group of CGUs that includes it.²

Reversing a Prior Impairment

Conditions change, and assets sometimes regain value after a write-down. At each reporting date, a company must check whether the factors that caused a previous impairment loss have improved. If they have, the loss is reversed, but only where the change reflects updated estimates of the recoverable amount rather than the unwinding of the discount rate over time.⁶

Two hard limits apply. The new carrying amount cannot exceed what the amount would have been, after normal depreciation or amortization, had no impairment ever been recognized. And a goodwill write-down can never be reversed. The standard treats a subsequent increase in the value of goodwill as more likely to be internally generated goodwill, which IFRS does not permit on the balance sheet.⁶

After a reversal, future depreciation spreads the restored carrying amount over the asset’s remaining useful life.

Required Disclosures

For each class of assets, a company must disclose the total impairment losses and reversals recognized during the period and identify which line items in the income statement or other comprehensive income were affected. Companies reporting segment information under IFRS 8 must break out those figures by reportable segment.²

For any individual asset or CGU where a material loss was recognized or reversed, the disclosures go further:

The events and circumstances that triggered the write-down or reversal.
The amount of the loss or reversal.
Whether the recoverable amount was based on fair value less costs of disposal or value in use.
If fair value was used, the level in the IFRS 13 fair value hierarchy, the valuation technique, and the key assumptions.
If value in use was used, the discount rate applied in both the current and prior estimate.

CGUs carrying significant goodwill or indefinite-life intangible assets face the most demanding requirements. Companies must reveal the key assumptions behind their cash flow projections, explain how those assumptions were determined, describe the projection period and justify any period longer than five years, state the growth rate used for extrapolation, and disclose the discount rate.²

How IAS 36 Differs from US GAAP

p>Companies reporting under US GAAP follow different impairment rules, and the gaps produce real differences in reported earnings. Three distinctions matter most.

The testing approach for long-lived assets like property and equipment is structurally different. IAS 36 uses a single-step test: compare carrying amount to recoverable amount, and if carrying amount is higher, the difference is the loss. US GAAP under ASC 360 uses a two-step process. The first step compares carrying amount to the sum of undiscounted future cash flows. If those undiscounted cash flows exceed the carrying amount, the asset passes and no loss is recorded, even if fair value sits below the carrying amount. Only if the asset fails that screen does the company measure the loss as the gap between carrying amount and fair value. Because undiscounted cash flows are almost always higher than discounted ones, the US GAAP screen lets more borderline assets avoid impairment.

Goodwill testing also diverges. Under US GAAP, goodwill is tested at the reporting unit level by comparing the unit’s fair value to its carrying amount, including goodwill. If the carrying amount exceeds fair value, the excess is the impairment loss, capped at the total goodwill allocated to that unit.⁷ Under IAS 36, goodwill is tested within a CGU using the same recoverable-amount framework applied to all other assets.

The starkest difference involves reversals. IAS 36 requires companies to reverse a previous impairment loss on any asset other than goodwill when conditions improve. US GAAP prohibits reversal entirely; once a long-lived asset or goodwill is written down, the lower value sticks permanently. Two companies holding identical assets under identical circumstances can therefore report different carrying amounts simply because one reports under IFRS and the other under US GAAP.

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Financial Accounting Standards Board. Goodwill Impairment Testing