IAS 36 - Impairment of assets

Publication date: 16 May 2018

Resources (This includes links to the latest standards, drafts, PwC interpretations, tools and practice aids for this topic.)

Latest developments

The IASB has a current research project on goodwill and impairment following the Post Implementation review of IFRS 3 (PIR). The project covers whether changes should be made to the existing impairment test for goodwill and other non-current, non-financial assets.

Topical issues

Regulatory interest and key reminders for impairment reviews

Impairment is an ongoing area of concern for many of our clients. Regulators remain focused on this area and continue to push for increased transparency in disclosures. Groups holding significant amounts of goodwill and intangibles are at greater risk of a regulatory challenge to their impairment assessments and in particular the related disclosures. The key points in impairment testing are:

  • For the value-in-use (VIU) model key assumptions should stand up against external market data. Cash flow growth assumptions should be comparable with up-to-date economic forecasts.
  • IAS 36 requires that the VIU model uses pre-tax cash flows discounted using a pre-tax discount rate. In practice, post-tax discount rates and cash flows are used which theoretically give the same answer but the need to consider deferred taxes makes this very complicated to achieve. Therefore if a post-tax VIU model results in a ‘near miss’ the next step should be to determine fair value less costs of disposal (FVLCD).
  • The fair value model, which is a post tax model, must use market participant assumptions, rather than those of management.
  • In assessing for impairment, the carrying value should be determined on a consistent basis as the recoverable amount. For example Where the recoverable amount is determined using the fair value model, the carrying amount tested should include current and deferred tax assets/liabilities (but exclude assets for tax losses, because these are treated as separate transactions).
  • Where the VIU model (that is pre-tax) is applied, deferred tax assets do not need to be added to the carrying value but deferred tax liabilities should not be deducted (i.e. are not included in the carrying amount of the CGU). This could result in the carrying value for VIU being higher than the carrying value for FVLCD. However, in situations where there is significant deferred tax upfront, an IAS 36 VIU test may not be the most appropriate method to determine the recoverable amount of a CGU.
  • For more tips on impairment reviews of non-financial assets, refer to In depth INT2015-08.

The required disclosures in IAS 36 are extensive. IAS 36 requires disclosure of the key assumptions (those that the recoverable amount is most sensitive to) and related sensitivity analysis. Note also IAS 1 para 125 requires disclosure of critical accounting judgements and of key sources of estimation uncertainty.

Regulators have observed that, whilst the long-term growth rate used to extrapolate cash flow projections (to estimate a terminal value) and the pre-tax discount rate are important; they are not ‘key assumptions’ on which the cash flow projections for the period covered by the most recent budgets or forecasts are based. Therefore, attention should also be paid to the discrete growth rate assumptions applied to the cash flows projected to occur before the terminal period.


Nearly all current and non-current financial assets are subject to an impairment test to ensure that they are not overstated on balance sheets.

The basic principle of impairment is that an asset may not be carried on the balance sheet above its recoverable amount. Recoverable amount is the higher of the asset's fair value less costs of disposal and its value in use.

  • Fair value less costs of disposal is “the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date”, less costs of disposal. Guidance on fair value is given in IFRS 13, ‘Fair value measurement’.
  • Value in use requires management to estimate the present value of the future cash flows that are expected to be derived from the asset in its current condition.

The carrying value of an asset is compared to the recoverable amount. An asset or CGU is impaired when its carrying amount exceeds its recoverable amount. Any impairment is allocated to the asset or assets of the CGU, with the impairment loss recognised in profit or loss.

All assets subject to the impairment guidance are tested for impairment when there is an indication that the asset may be impaired. Assets that are note amortised, such as goodwill, indefinite lived intangible assets and intangible assets that are not yet available for use, are also tested for impairment annually even if there is no impairment indicator.

Both external indicators (for example, significant adverse changes in the technological, market, economic or legal environment or increases in market interest rates) and internal indicators (for example, evidence of obsolescence or physical damage of an asset or evidence from internal reporting that the economic performance of an asset is, or will be, worse than expected) are considered, when considering whether an asset is impaired,.

An asset seldom generates cash flows independently of other assets. Most assets are tested for impairment in groups of assets described as cash-generating units (CGUs). A CGU is the smallest identifiable group of assets that generates inflows that are largely independent from the cash flows from other CGUs.

Impairment should be identified at the individual asset level, where possible. The recoverable amount should be calculated for the CGU to which the asset belongs only where the recoverable amount for the individual asset cannot be identified. An impairment review of a CGU should cover all of its tangible assets, intangible assets and attributable goodwill. The carrying value of each CGU containing the assets and goodwill being reviewed should be compared with the higher of its value in use and fair value less costs of disposal.

Goodwill acquired in a business combination is allocated to the acquirer’s CGUs or groups of CGUs that are expected to benefit from the synergies of the business combination. However, the largest group of CGUs permitted for goodwill impairment testing is an operating segment before aggregation.
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