IAS 36 – Impairment of assets

The basic principle of IAS 36 Impairment of assets is that an asset should be carried at no more than its recoverable amount.

The recoverable amount is the amount to be recovered through use or sale of the asset.

Therefore, the recoverable amount is defined as the higher of:

  • The asset’s fair value less costs of disposal (NRV).
  • The asset’s value in use, which reflects the present value of estimated future cash flows.

If an asset’s value is higher than its recoverable amount, an impairment loss has occurred. The impairment loss should be written off against other comprehensive income in respect of any revaluation surplus relating to the asset and then to profit or loss.

The entity should look for evidence of impairment at the end of each period and conduct an impairment review on any asset where there is evidence of impairment.

The following list gives some indicators of impairment:

  • External
    • Observable indications that the asset’s value has declined during the period significantly more than expected due to the passage of time or normal use
    • Significant changes with an adverse effect on the entity in the technological / market / economic / legal environment
    • Increased market interest rates
  • Internal
    • Evidence of obsolescence or physical damage
    • The asset becomes idle
    • Plans to discontinue/ restructure the operation to which the asset belongs
    • Internal evidence available that asset performance will be worse than expected.

Where it is not possible to estimate the recoverable amount of an individual asset, the entity estimates the recoverable amount of the cash-generating unit to which it belongs.

A cash-generating unit (CGU) is 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.

The issue here is how to allocate an impairment loss to a group of assets. IAS 36 proposes the following order:

  1. Goodwill allocated to the CGU
  2. Other assets on a pro-rata basis based on carrying amount

Example 1

A business which comprises a single cash-generating unit has the following assets:

  • Goodwill $3m
  • Patent $5m
  • Property $10m
  • Plant and equipment $15m
  • Net current assets $2m

Following an impairment review it is estimated that the value of the Patent is $2m and the recoverable amount (RA) of the business is $24m.

CV Impairment RA
Goodwill 3 -3 0
Patent 5 -3 2
Property 10 -2 8
Plant & Equipment 15 -3 12
Current Assets* 2 0 2
Total 35 -11 24

The Goodwill is written off, the Patent is written down to $2m and the remaining $5m impairment is allocated pro-rata to the Property and the Plant and equipment.

 *No impairment loss is allocated to the Current assets, since they are outside the scope of IAS 36.

The carrying amount of an asset cannot be reduced below the higher of its recoverable amount (if determinable) and zero.

The amount of the impairment loss that would otherwise have been allocated to the asset is allocated to the other assets on a pro-rata basis.

Example 2

Let’s assume from the previous example, that the NRV of Property is $9m.

This would restrict the impairment loss allocated to Property since its RA could not fall below $9m. Therefore, the impairment loss allocated should be $1m and not $2m as before.

The extra $1m of impairment would be allocated to Plant and equipment.

CV Impairment RA
Goodwill 3 -3 0
Patent 5 -3 2
Property 10 -1 9
Plant & Equipment 15 -4 11
Current Assets* 2 0 2
Total 35 -11 24

The depreciation/amortization is adjusted in future periods to allocate the asset’s revised carrying amount less its residual value on a systematic basis over its remaining useful life.

A reversal of an impairment loss for a CGU, is allocated to the assets of the CGU (except for goodwill) pro-rata with the carrying amounts of those assets.

However, the carrying amount of an asset is not increased above the lower of:

  • its recoverable amount (if determinable); and
  • its depreciated carrying amount had no impairment loss originally been recognized.