IAS 36

IAS 36 Impairment of Assets is the standard in International Financial Reporting Standards that requires an entity to make sure its assets are not carried at more than their recoverable amount. If the carrying amount of an asset is higher than the amount that could be recovered through using it or selling it, the asset is impaired and the entity must recognise an impairment loss. The standard sets out when to test, how to measure the recoverable amount, and when a loss may later be reversed.

It applies mainly to property, plant and equipment, intangible assets, goodwill, right-of-use assets under leases, investment property carried at cost, and investments in subsidiaries, associates and joint ventures. It does not apply to assets covered by their own rules, including inventories, deferred tax assets, financial assets within IFRS 9, and investment property measured at fair value. The standard was issued in 1998 and revised in 2004 alongside the standard on business combinations.

At the end of each reporting period an entity assesses whether there is any indication that an asset may be impaired. External indications include a significant fall in market value, adverse changes in technology, markets, the economy or the law, a rise in market interest rates, and a market capitalisation below the entity's net assets. Internal indications include obsolescence or physical damage, plans to discontinue or restructure an operation, and evidence that the asset is performing worse than expected.

Three types of asset must be tested every year whether or not there is any indication: goodwill acquired in a business combination, intangible assets with an indefinite useful life, and intangible assets not yet available for use.

The recoverable amount is the higher of two figures:

• Fair value less costs of disposal is the price that would be received to sell the asset in an orderly transaction between market participants, less the incremental costs of selling it.
• Value in use is the present value of the future cash flows expected from continuing use of the asset and from its disposal at the end of its life.

Value in use is based on reasonable and supportable assumptions, using the most recent budgets approved by management, which normally cover no more than five years, with a steady or declining growth rate beyond that. The cash flows exclude the effects of future restructurings to which the entity is not yet committed and of improvements to the asset's performance. They are discounted at a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If either figure exceeds the carrying amount, the asset is not impaired and the other need not be estimated.

Many assets do not produce cash inflows on their own. Where the recoverable amount of an individual asset cannot be determined, the test is applied to the cash-generating unit to which it belongs: the smallest identifiable group of assets that generates cash inflows largely independent of those from other assets.

Goodwill never generates cash flows independently. From the acquisition date it is allocated to the units, or groups of units, expected to benefit from the combination. Each must represent the lowest level at which goodwill is monitored internally and may not be larger than an operating segment. When a unit is impaired, the loss is applied first to reduce any goodwill allocated to it and then to the other assets of the unit in proportion to their carrying amounts, with no asset reduced below the highest of its own fair value less costs of disposal, its value in use and zero.

An impairment loss is recognised immediately in profit or loss, unless the asset is carried at a revalued amount, in which case it is treated as a revaluation decrease. Future depreciation is adjusted to the new carrying amount. The process of recording and tracking these charges is described under impairment accounting.

At each reporting date an entity also considers whether an earlier loss may have decreased or no longer exist. If the estimates used to determine recoverable amount have changed, the loss is reversed, but only up to the carrying amount that would have applied, net of depreciation, had no loss been recognised. An impairment loss on goodwill is never reversed.

Entities disclose impairment losses and reversals by class of asset and segment, the events that led to them, and, for units containing significant goodwill or indefinite-life intangibles, the key assumptions, growth rates and discount rates used.

The model is criticised for depending heavily on management forecasts, which tend to be optimistic, so that goodwill impairment is often recognised too late. Goodwill can also be shielded by the unrecognised headroom of the unit to which it is allocated. The Board has considered, and so far rejected, a return to amortising goodwill. US rules differ: they do not permit reversals for assets held for use and apply a different test to long-lived assets based first on undiscounted cash flows.

• IFRS Foundation