IAS 36

IAS 36 is an International Accounting Standard issued by the International Accounting Standards Board (IASB) that outlines the procedures an entity must apply to ensure that its assets are carried at no more than their recoverable amount.^[1] If an asset's carrying amount exceeds the amount to be recovered through use or sale, the asset is described as impaired and the standard requires the entity to recognize an impairment loss.^[2]

Core Principle: The Recoverable Amount

The fundamental rule of IAS 36 is that an asset is impaired when its carrying amount (the value on the balance sheet) is higher than its recoverable amount.^[3]

The recoverable amount is defined as the higher of two values:^[4]

1. Fair value less costs of disposal: The price that would be received to sell an asset in an orderly transaction between market participants, minus the costs of getting rid of it.^[5]
2. Value in use: The present value of the future cash flows expected to be derived from the asset or cash-generating unit.^[6]

When to Test for Impairment

An entity must assess at each reporting date whether there is any indication that an asset may be impaired.^[7] If such indications exist (e.g., significant fall in market value, obsolescence, or poor economic performance), a formal estimate of the recoverable amount is required.^[8]

Regardless of indicators, the following must be tested for impairment annually:^[9]

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

Cash-Generating Units (CGU)

If it is not possible to estimate the recoverable amount for an individual asset (because the asset does not generate cash inflows that are largely independent), the entity identifies the smallest identifiable group of assets that generates independent cash inflows—this is known as a Cash-Generating Unit (CGU).^[10]

Practical Example: The Retail Store (Example 1) A retail chain owns a specific store that uses a customized checkout system. The checkout system itself does not generate independent cash flows; the store as a whole does. Therefore, the store is the CGU. If the store's performance declines, the entire store’s assets (including the checkout system and the building) are tested for impairment together.^[11]

Recognizing and Reversing Losses

An impairment loss is recognized immediately in profit or loss (unless the asset is carried at a revalued amount under another standard like IAS 16).^[12]

Allocation of Impairment Loss to a CGU

Priority	Target Asset	Reasoning
First	Goodwill	Goodwill is the most subjective asset and must be "written off" first.[13]
Second	Other assets in the CGU	The remaining loss is allocated on a pro-rata basis based on the carrying amounts.[14]

Reversals: IAS 36 requires entities to assess whether an impairment loss recognized in prior years (except for goodwill) may no longer exist or may have decreased. If so, the loss is reversed.^[15] Impairment losses recognized for goodwill can never be reversed.^[16]

Disclosures

Entities must disclose the events and circumstances that led to the recognition or reversal of an impairment loss, the segment to which the asset belongs, and the methods used to determine fair value or value in use (such as the discount rate).^[17]

References

1. IAS 36.1; IAS 36.BC1.
2. IAS 36.8; IAS 36.BC11.
3. IAS 36.9.
4. IAS 36.18; IAS 36.BC22.
5. IAS 36.6; IFRS 13.
6. IAS 36.6; IAS 36.30.
7. IAS 36.9.
8. IAS 36.12.
9. IAS 36.10; IAS 36.BC83.
10. IAS 36.66; IAS 36.BC122.
11. IAS 36.IE Example 1.
12. IAS 36.60.
13. IAS 36.104(a).
14. IAS 36.104(b).
15. IAS 36.110; IAS 36.BC182.
16. IAS 36.124; IAS 36.BC187.
17. IAS 36.126; IAS 36.130.