IAS 36 Impairment of Assets provides that an asset is impaired when its carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset's fair value less costs of disposal and its value in use.
How Are Impairment Loss and Recoverable Amount Defined?
The Standard defines an impairment loss as the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount. It defines the recoverable amount of an asset or a cash-generating unit as the higher of its fair value less costs of disposal and its value in use. Value in use is defined as the present value of the future cash flows expected to be derived from an asset or cash-generating unit.
When Must an Entity Estimate Recoverable Amount?
The Standard requires an entity to assess at the end of each reporting period whether there is any indication that an asset may be impaired; if any such indication exists, the entity shall estimate the recoverable amount of the asset.
Irrespective of whether there is any indication of impairment, the Standard also requires an entity to test an intangible asset with an indefinite useful life, or an intangible asset not yet available for use, for impairment annually by comparing its carrying amount with its recoverable amount, and to test goodwill acquired in a business combination for impairment annually.
Indicators That an Asset May Be Impaired
The Standard sets out a non-exhaustive list of external and internal indications that an entity considers as a minimum in assessing whether an asset may be impaired, including: observable indications that the asset's value has declined during the period significantly more than would be expected as a result of the passage of time or normal use, and evidence of obsolescence or physical damage of an asset.
Other external indicators listed by the Standard include a rise in market interest rates or other market rates of return on investments during the period, where the increase is likely to affect the discount rate used in calculating an asset's value in use and decrease its recoverable amount materially. The Standard also treats a carrying amount of the entity's net assets that is more than its market capitalisation as a further external indicator of possible impairment.
What Is the Scope of This Test?
The Standard applies to the impairment of all assets other than specified categories it excludes from its scope, such as inventories, deferred tax assets, assets arising from employee benefits, and investment property measured at fair value, each of which is instead dealt with under its own Standard.
Illustrative example (assumed figures): Assume an asset has a carrying amount of 500, its fair value less costs of disposal is estimated at 420, and its value in use is estimated at 460. Recoverable amount = the higher of 420 and 460 = 460. Since the carrying amount (500) exceeds the recoverable amount (460), the asset is impaired, and an impairment loss of 40 (500 − 460) is recognised.
Legal References
- IAS 36 — Impairment of Assets, paragraph 6 (definitions of impairment loss, recoverable amount and value in use)
- IAS 36 — Impairment of Assets, paragraph 8 (when an asset is impaired)
- IAS 36 — Impairment of Assets, paragraph 9 (assessing impairment indicators at each reporting date)
- IAS 36 — Impairment of Assets, paragraph 10 (mandatory annual test for goodwill and indefinite-life intangibles)
- IAS 36 — Impairment of Assets, paragraph 12 (external and internal indications of impairment, including interest rates and market capitalisation)
- IAS 36 — Impairment of Assets, paragraph 2 (scope of the Standard and its exclusions)
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