IAS 36 sets the global standard for asset impairment testing, ensuring that no asset remains recorded above its recoverable amount. Its relevance goes beyond technical compliance—it protects the integrity of financial statements, supports investor confidence, and guides strategic asset decisions.

In recent years, impairment losses have played a central role in financial reporting, especially in sectors facing digital disruption, market instability, or post-pandemic recovery. Failing to assess impairment accurately can lead to misstated results, regulatory penalties, and reputational risk. This article explores the best practices for implementing IAS 36 in your organization. We’ll break down key concepts such as recoverable value, cash-generating units (CGUs), fair value less costs of disposal (FVLCD), and value in use (VIU). You’ll also gain insights into identifying impairment indicators, applying annual tests for goodwill and intangibles, and aligning testing methods with audit and compliance expectations.

Understanding IAS 36

IAS 36 is the international accounting standard that governs impairment of assets. It aims to ensure that an asset is not carried in the financial statements at more than its recoverable amount.

Recoverable amount is defined as the higher of an asset’s fair value less costs of disposal and its value in use. If the carrying amount exceeds this value, the asset is considered impaired, and an impairment loss must be recognized.

This standard applies to a wide range of non-financial assets, including property, plant and equipment, intangible assets, goodwill, and right-of-use assets. However, certain assets—such as inventories, deferred tax assets, and financial instruments under IFRS 9—are excluded and covered by other specific standards.

IAS 36 also sets annual impairment testing requirements for goodwill and other intangible assets with indefinite useful lives, regardless of whether impairment indicators are present. This ensures that entities regularly evaluate the true economic value of critical assets.

The consistent application of IAS 36 is essential for transparent financial reporting and compliance with international accounting frameworks. It requires professional judgment, especially when identifying cash-generating units and estimating future cash flows under uncertainty.

Scope and Objectives

The scope of IAS 36 includes all non-financial assets that are subject to potential impairment. This covers tangible assets such as buildings, machinery, and equipment, as well as intangible assets like trademarks, software, and goodwill.

It also applies to investments in subsidiaries, joint ventures, and associates when accounted for in separate financial statements.

The standard does not apply to inventories, deferred tax assets, employee benefits, or financial assets within the scope of IFRS 9, as these are governed by other specific standards.

The core objective of IAS 36 is to prevent overstatement of asset values. To achieve this, entities must assess at each reporting date whether indicators of impairment are present. If such indicators exist, the recoverable amount must be estimated and compared with the carrying amount.

When the carrying amount exceeds the recoverable amount, an impairment loss is recognized. In certain cases, such as with goodwill and indefinite-life intangibles, entities must perform impairment tests annually regardless of indicators.

IAS 36 promotes financial discipline by ensuring asset values reflect economic reality. It provides a consistent framework for identifying when and how impairments should be measured and disclosed, enhancing the reliability of financial reports and supporting informed stakeholder decisions.

Key Definitions

To apply IAS 36 correctly, it is essential to understand a set of technical terms that form the foundation of impairment testing. These definitions clarify how asset values are assessed and guide consistent application of the standard across different asset types and industries.

The carrying amount is the value at which an asset is recognized in the balance sheet, net of accumulated depreciation, amortization, and any prior impairment losses. This is the baseline for comparison during an impairment test.

The recoverable amount is the higher of two values: the fair value less costs of disposal, and the value in use. It represents the maximum amount expected to be recovered from the asset, either through sale or continued use.

Fair value less costs of disposal refers to the price that would be received from selling an asset in an orderly transaction between market participants, minus direct costs to sell. This is based on observable market data and excludes entity-specific assumptions.

Value in use is the present value of future cash flows expected from the asset’s ongoing use and eventual disposal. It is based on the entity’s internal projections and reflects assumptions about future economic conditions, growth rates, and risks.

A cash-generating unit (CGU) is the smallest group of assets that independently generates cash inflows. For assets that do not produce independent inflows, testing must be performed at the CGU level.

These definitions are critical for interpreting IAS 36. They influence key decisions during impairment testing, from setting discount rates to allocating goodwill and documenting assumptions for audit and compliance.

Impairment Indicators

IAS 36 requires entities to assess, at each reporting date, whether there are indications that an asset may be impaired. These impairment indicators are essential triggers for initiating the recoverability test and are divided into external and internal sources.

• External indicators include observable changes in market conditions that negatively affect asset value. Examples are a significant decline in market prices, adverse economic or legal changes, or increases in market interest rates that reduce the asset’s present value. Another signal is when the entity’s net asset value exceeds its market capitalization.
• Internal indicators arise from within the organization and may include evidence of obsolescence, physical damage, or operational underperformance. Significant changes in how an asset is used—such as discontinuation, restructuring, or reduced output—can also be red flags. Additionally, internal reporting that suggests a decline in expected economic performance must be considered.

If one or more of these indicators are present, the entity must estimate the recoverable amount of the asset or CGU. The absence of indicators does not exempt certain assets from testing; goodwill and intangible assets with indefinite useful lives require annual impairment testing regardless of circumstances.

A disciplined approach to monitoring and documenting impairment indicators ensures timely recognition of losses and reduces the risk of audit challenges or misstatements in financial reports.

Impairment Testing Process

IAS 36 outlines a structured approach for impairment testing. This process ensures that assets are not carried above their recoverable amounts and that financial statements reflect economic reality. The steps below form a consistent and auditable methodology.

Step 1: Identify Assets for Testing

Assets must be tested when:

• Impairment indicators are present at the reporting date.
• They are goodwill or intangible assets with indefinite useful lives (annual test required).
• They are intangible assets not yet available for use.

Step 2: Determine the Testing Level

Assess whether the asset generates independent cash flows. If not, group it within a cash-generating unit (CGU). This is especially relevant for assets that are interdependent in use.

Step 3: Calculate Carrying Amount

Determine the total carrying amount of the asset or CGU, including:

• Historical cost
• Less accumulated depreciation or amortization
• Less prior recognized impairment losses

Step 4: Estimate Recoverable Amount

Estimate both:

• Fair value less costs of disposal (FVLCD)
• Value in use (VIU)

Only the higher of the two is used for comparison. If this amount is higher than the carrying amount, no impairment is recognized.

Step 5: Compare and Recognize Impairment Loss

If the recoverable amount is less than the carrying amount:

• Recognize the impairment loss in the income statement.
• If testing a CGU, allocate the loss first to goodwill, then to other assets on a pro-rata basis.

Step 6: Document and Disclose

Ensure complete documentation of:

• Key assumptions
• Discount rates used in VIU
• Methodology for CGU determination
• Basis for valuation inputs and judgments

Disclose all material impairment losses, reversals, and relevant assumptions in the notes to the financial statements, as required by IAS 36.

Identifying Cash-Generating Units

A key aspect of IAS 36 is determining the appropriate level for impairment testing. When assets do not generate cash inflows independently, they must be grouped into a cash-generating unit (CGU)—the smallest group of assets that generates cash inflows largely independent of other assets.

What Defines a CGU?

A CGU is not defined by legal entities or business lines alone. It reflects how management monitors performance and makes decisions. IAS 36 emphasizes substance over form.

Key factors include:

• Whether cash inflows from the asset are independent of other assets.
• How management organizes operations for internal reporting.
• Whether an active market exists for the asset’s outputs.

Practical Examples of CGU Determination

• Retail chains: Each individual store may be a CGU if it generates separate cash flows.
• Manufacturing: A production line may be part of a larger CGU if its outputs are interdependent with other units.
• Software firms: A software product line with its own revenue stream may form a CGU, even if R&D or infrastructure is shared.

Challenges in Defining CGUs

Identifying CGUs often requires significant judgment, especially when:

• Assets are shared across multiple functions.
• Centralized operations support multiple products or regions.
• Synergies exist between business units.

Inconsistent CGU definitions may lead to unreliable impairment results. Once defined, CGUs must be applied consistently over time unless significant changes in business structure or monitoring occur.

Factors to Consider When Identifying CGUs

Determining the boundaries of a cash-generating unit (CGU) requires more than accounting logic—it demands alignment with how the business operates and makes decisions. IAS 36 provides flexibility, but this flexibility must be supported by consistent and well-documented reasoning.

Operational and Managerial Structure

How management monitors operations is one of the most important inputs in defining CGUs. The following questions are critical:

• Are financial results tracked by product line, geographic region, or service type?
• Does each unit have decision-making autonomy or shared oversight?
• Are performance targets and budgets assigned at a granular or consolidated level?

A CGU should reflect the level at which the entity evaluates performance and allocates resources internally.

Interdependence of Cash Flows

When cash flows from one asset depend significantly on another, these assets must be grouped into the same CGU. High interdependence means that the asset cannot be assessed for impairment on its own.

Examples include:

• A specialized production facility that only serves a single product line.
• A corporate headquarters that supports multiple business units.
• Logistics infrastructure serving both retail and e-commerce channels.

External Market Considerations

An active external market for outputs can help support the separation of CGUs. If a product or service can be priced and sold independently, its related assets may justify their own CGU.

In contrast, when pricing or delivery depends on broader bundles of products or services, a larger CGU may be appropriate.

Consistency Over Time

Once CGUs are defined, consistency is crucial. Frequent changes to CGU boundaries undermine comparability and may raise concerns in audits.

Redefinition is only justified by structural reorganizations, acquisitions, or divestitures that alter cash flow generation patterns.

Maintaining discipline in CGU identification helps preserve the credibility of impairment testing outcomes and supports a more transparent valuation framework.

Goodwill Allocation and Testing

Goodwill, by its nature, does not generate independent cash flows. It must therefore be allocated to one or more cash-generating units (CGUs) or groups of CGUs that are expected to benefit from the synergies of a business combination.

Allocation of Goodwill to CGUs

At the time of acquisition, goodwill is allocated to the CGUs that management expects will benefit from the acquired business.

This allocation must be performed at the lowest level at which goodwill is monitored internally, and it cannot exceed the level of an operating segment as defined by IFRS 8.

Key considerations in allocation include:

• Strategic alignment between the acquired entity and the existing business units
• Projected cost and revenue synergies
• How performance of the acquired business is tracked and reviewed internally

If goodwill cannot be allocated on a non-arbitrary basis to individual CGUs, it must be tested for impairment at a higher level: the group of CGUs to which it relates.

Annual Testing Requirement

IAS 36 mandates that goodwill be tested for impairment at least annually, regardless of whether any indicators of impairment exist.

The test may be conducted at any time during the annual period, but it must be applied consistently year after year. This annual assessment includes:

• Calculating the carrying amount of the CGU including the allocated goodwill
• Estimating the recoverable amount of the CGU
• Recognizing an impairment loss if the carrying amount exceeds the recoverable amount

Reallocation of Goodwill

When a reorganization alters the structure of CGUs, goodwill must be reallocated using a relative value approach.

This involves assigning goodwill to the revised CGUs based on the relative fair values of the newly defined units. Reallocation is required in situations such as:

• Divestitures or spin-offs
• Mergers between operating units
• Strategic changes in reporting lines or management oversight

Accurate and consistent goodwill allocation is essential for maintaining the integrity of impairment testing and supporting transparency in financial reporting.

Determining Recoverable Amount

The recoverable amount is the cornerstone of impairment testing under IAS 36. It is defined as the higher of an asset’s or CGU’s fair value less costs of disposal (FVLCD) and its value in use (VIU). Determining this amount with precision is essential to ensure accurate asset valuation.

Fair Value Less Costs of Disposal

This represents the price that could be obtained from selling an asset or CGU in an orderly transaction, less any direct costs to sell.

Key features include:

• Based on market participant assumptions, not internal projections
• Often determined using observable market prices or valuation models
• Costs of disposal may include legal fees, taxes, removal costs, and transaction expenses

FVLCD is typically used when there is an active market for the asset or when a sale is being considered.

Value in Use

Value in use refers to the present value of future cash flows expected from continuing use of the asset or CGU and from its disposal at the end of its useful life.

To calculate VIU, entities must:

• Project cash flows based on recent budgets or forecasts
• Limit the forecast period to five years unless a longer period is justified
• Use a terminal growth rate that does not exceed market expectations
• Exclude future restructuring plans or capital improvements not yet committed

Cash flow projections must be supported by reasonable and evidence-based assumptions, including expected sales volumes, operating margins, and cost structures.

Discount Rate Selection

The discount rate applied to VIU must:

• Be a pre-tax rate
• Reflect current market conditions and the time value of money
• Include risks specific to the asset or CGU not already considered in the cash flows

Often, the starting point is the entity’s weighted average cost of capital (WACC), adjusted for asset-specific risks. The choice of discount rate can materially impact the outcome of the impairment test and must be well-documented.

When to Use FVLCD or VIU

IAS 36 does not require both methods to be calculated. If one method yields a value greater than the carrying amount, the asset is not impaired, and the second method is not required.

The choice between FVLCD and VIU often depends on:

• Availability of reliable market data
• Internal capacity to generate long-term forecasts
• Nature of the asset and strategic intent (use versus disposal)

A transparent and defensible methodology for determining the recoverable amount strengthens the reliability of impairment assessments and facilitates audit and regulatory review.

Fair Value Less Costs of Disposal

Fair value less costs of disposal (FVLCD) represents the amount that could be obtained from selling an asset or CGU in an orderly transaction between market participants, minus the direct costs of disposal. It is one of the two components used to determine the recoverable amount under IAS 36.

Methods for Determining Fair Value

The appropriate valuation technique depends on the availability of market data and the nature of the asset. Common approaches include:

• Market approach: Uses quoted prices in active markets for identical or similar assets. This method is preferred when such data is available and reliable.
• Income approach: Applies discounted cash flow techniques to convert expected future income into a present value. This is useful when market prices are not observable but forecasted earnings can be reasonably estimated.
• Cost approach: Reflects the amount required to replace the service capacity of an asset, less depreciation. Often used for specialized or rarely traded assets.

These approaches follow the guidelines established in IFRS 13 on fair value measurement.

Examples of Disposal Costs

Costs of disposal must be incremental and directly attributable to the sale of the asset. They may include:

• Legal and consulting fees related to the transaction
• Stamp duties and taxes on the transfer of ownership
• Marketing or brokerage fees
• Removal and dismantling costs necessary for sale

Disposal costs do not include:

• Costs associated with restructuring or terminating operations
• Future capital expenditures to improve or prepare the asset for new uses
• General administrative overhead not specific to the transaction

The amount resulting from FVLCD must be based on observable market inputs whenever possible. Assumptions used in its estimation should reflect those that market participants would use in pricing the asset, rather than entity-specific intentions.

FVLCD provides an objective benchmark for assessing whether an asset or CGU is overvalued on the books, especially when a potential sale is under consideration or the market provides clear valuation signals.

Value in Use

Value in use (VIU) is the present value of the future cash flows expected to arise from the continued use of an asset or CGU and from its disposal at the end of its useful life. This method reflects the asset’s value to the entity, based on internal projections rather than market-based assumptions.

Components of Value in Use

To estimate VIU, entities must project future cash flows and discount them appropriately. The calculation involves:

• Cash inflows from the use of the asset or CGU
• Cash outflows necessary to maintain and operate the asset
• Net cash flows from its eventual disposal

These projections must exclude:

• Cash flows related to future restructuring not yet committed
• Improvements or enhancements not already in progress
• Financing activities such as interest payments or loan repayments
• Income tax receipts or payments

The focus is on operational cash flows that reflect the ongoing performance of the asset in its current condition.

Forecast Period and Terminal Value

Cash flow projections are typically limited to a five-year forecast period, unless a longer period can be justified. After this, a terminal value is calculated using a steady or declining growth rate.

Guidelines for forecast assumptions:

• Projections must be based on the most recent approved budgets or plans
• Assumptions must be realistic, evidence-based, and internally consistent
• Growth rates should not exceed the long-term average for the industry or market

Entities must document the rationale behind these assumptions, including market trends, operational metrics, and historical performance.

Discount Rate Considerations

The discount rate used must be a pre-tax rate that reflects:

• The time value of money
• Specific risks related to the asset or CGU, to the extent not already reflected in the cash flows

A commonly used approach is to start with the weighted average cost of capital (WACC) and adjust it for asset-specific risk factors. In practice, the final discount rate may be validated through iterative calculations that align pre-tax and post-tax results.

A small variation in the discount rate can have a significant impact on VIU. Therefore, all assumptions and inputs must be carefully supported, documented, and regularly reviewed.

Value in use is particularly useful when market data is limited or when the asset’s strategic importance or synergies make a market-based valuation less reflective of its actual utility to the business.

Choosing Between FVLCD and VIU

IAS 36 allows entities to estimate either fair value less costs of disposal (FVLCD) or value in use (VIU) to determine the recoverable amount of an asset or CGU. It is not mandatory to calculate both. If one of these amounts exceeds the carrying amount, the asset is not impaired, and no further testing is required.

Strategic Considerations for Choosing the Method

The choice between FVLCD and VIU depends on the characteristics of the asset and the availability of reliable data.

Situations where FVLCD is preferred:

• There is an active and observable market for the asset
• The asset is being considered for sale or is no longer strategic
• Market-based valuation provides objective evidence of value

Situations where VIU is more appropriate:

• The asset generates significant value through internal synergies
• Reliable market data is not available
• Management intends to continue using the asset in operations
• The asset is highly specialized or integrated with other business units

Practical Examples

• A standalone retail store in a competitive market with known sales prices may be valued using FVLCD.
• A manufacturing facility with customized production and no active market may require a VIU approach.
• Intangible assets such as software platforms that generate internal benefits may also require VIU due to the lack of external comparables.

Documentation and Judgment

The decision to apply FVLCD or VIU must be clearly documented. It should reflect:

• The nature of the asset and its intended use
• The reliability and source of valuation data
• The relevance of market participant assumptions versus entity-specific forecasts

Entities must also be prepared to justify the chosen method to auditors and regulators, particularly in cases where significant judgment is applied or when the impairment conclusion is sensitive to inputs like growth rates or discount rates.

Selecting the appropriate method is not merely a technical step. It has direct implications for reported financial results, investor perception, and audit exposure.

Best Practices

Implementing IAS 36 effectively requires more than following procedures. It demands a proactive, structured approach that aligns technical compliance with strategic financial management.

The following best practices support accuracy, audit readiness, and long-term consistency in impairment testing.

Establish a Clear Testing Framework

• Define roles and responsibilities across finance, operations, and senior management
• Create an annual timeline that aligns impairment testing with financial reporting cycles
• Use standardized templates for documenting CGU identification, valuation inputs, and assumptions

A defined framework minimizes the risk of oversight and ensures comparability across periods.

Strengthen Cash Flow Projections

• Base forecasts on current budgets approved by leadership
• Use reasonable and supportable assumptions, grounded in past performance and market conditions
• Limit projections to five years unless extended periods are clearly justified
• Include terminal value calculations with defensible long-term growth rates

Reliable projections are essential for both value in use calculations and credibility with auditors.

Document Assumptions and Judgments

• Record all inputs used in valuation models, including discount rates, revenue growth, cost structures, and terminal growth rates
• Justify assumptions with external benchmarks, internal trends, or third-party data
• Maintain detailed support files for audit and regulatory review

Thorough documentation strengthens transparency and mitigates disputes.

Apply Consistent Methodologies

• Maintain consistency in CGU identification over time, unless organizational changes occur
• Use consistent valuation techniques across similar asset classes
• Regularly review discount rate methodologies for alignment with market conditions and risk factors

Consistency enhances comparability and reduces audit risk.

Perform Sensitivity Analysis

• Test how changes in key assumptions affect the recoverable amount
• Focus on discount rates, growth projections, and terminal values
• Use multiple scenarios (base, optimistic, pessimistic) when uncertainty is high

Sensitivity analysis reveals where impairment conclusions are most vulnerable and improves risk management.

Engage with Auditors Early

• Share impairment methodologies and key judgments before year-end
• Address potential concerns proactively
• Ensure disclosures meet IAS 36 requirements and include relevant detail

Early engagement avoids last-minute revisions and improves audit outcomes.

Adopting these best practices transforms impairment testing from a compliance exercise into a tool for strategic financial oversight and operational insight.

How CPCON Supports Organizations with IAS 36 Compliance

Implementing IAS 36 goes beyond technical accounting. It requires a cross-functional view of asset performance, valuation strategies, and operational realities. CPCON offers specialized support to help companies meet these requirements with precision, agility, and confidence.

Strategic Asset Valuation and Recoverability Analysis

CPCON delivers robust asset valuation services aligned with IAS 36 guidelines, supporting the determination of recoverable amounts through:

• Fair value assessments based on market participant assumptions
• Cash flow modeling tailored to value in use calculations
• Discount rate validation using industry benchmarks and risk profiles

These services provide the technical backbone for consistent and auditable impairment testing.

Identification and Structuring of CGUs

Our experts work closely with finance and operations teams to define CGUs that reflect how cash flows are generated and monitored. This includes:

• Mapping asset use and interdependencies
• Structuring CGUs aligned with internal reporting
• Documenting criteria and rationale for audit defense

This structured approach ensures that impairment testing is aligned with both organizational structure and accounting requirements.

Documentation, Controls, and Audit Readiness

CPCON helps companies establish internal controls and documentation standards that reduce audit risks. We provide:

• Custom templates for impairment documentation
• Support for sensitivity analyses and assumption validation
• Training for teams involved in the impairment process

Our goal is to make your impairment testing defensible, replicable, and fully compliant.

Integration with Broader Asset Management Strategies

Beyond impairment testing, CPCON integrates IAS 36 requirements into broader asset lifecycle and financial reporting processes. We align impairment analysis with:

• Fixed asset inventory and reconciliation
• Accumulated depreciation and amortization tracking
• Capital budgeting and restructuring planning

This integrated approach enables better decision-making and increased visibility into asset performance and risk.

CPCON combines deep technical expertise in IFRS with hands-on operational knowledge, making us a trusted partner for companies that seek to elevate their compliance and asset management practices.

Conclusion

IAS 36 is a critical standard for ensuring that asset values reported in financial statements reflect economic reality. Its requirements go beyond accounting procedures—they demand judgment, documentation, and strategic alignment between finance and operations.

When applied correctly, impairment testing provides meaningful insights into asset performance, future cash flow potential, and capital efficiency. It supports transparency, strengthens investor confidence, and reduces audit exposure.

By adopting best practices, maintaining consistent methodologies, and leveraging expert support, companies can transform impairment testing into a strategic process that enhances both compliance and business decision-making.

Ready to Strengthen Your IAS 36 Compliance Strategy?

Partner with CPCON to build a structured, defensible impairment testing process that aligns with international standards and enhances your financial reporting integrity.

FAQ

What is IAS 36 and why is it important?

IAS 36 is the international accounting standard that regulates the impairment of assets. It ensures that assets are not carried in the financial statements at more than their recoverable amount, protecting the accuracy and reliability of financial reporting.

How is the recoverable amount of an asset determined?

The recoverable amount is the higher of fair value less costs of disposal (FVLCD) and value in use (VIU). Only one of these needs to be calculated if it exceeds the carrying amount and shows no impairment.

What are common impairment indicators to monitor?

Common indicators include a significant decline in market value, adverse economic or legal changes, underperformance, obsolescence, or internal decisions to restructure or discontinue use of the asset.

When is impairment testing required annually?

Annual impairment testing is mandatory for goodwill, intangible assets with indefinite useful lives, and intangible assets not yet available for use, regardless of whether impairment indicators exist.

What are the key challenges in applying IAS 36?

Challenges include identifying appropriate CGUs, preparing reliable cash flow forecasts, selecting accurate discount rates, and documenting assumptions for audit compliance.

Can an impairment loss be reversed?

Yes, except for goodwill. IAS 36 allows the reversal of an impairment loss if there is an indication that the circumstances leading to the loss have changed and the recoverable amount has increased.

How can CPCON help with IAS 36 compliance?

CPCON offers end-to-end support, including asset valuation, CGU identification, cash flow modeling, documentation, and audit preparation. We align technical compliance with strategic asset management to deliver reliable and actionable insights.