Key Points
- An impairment loss is recognised when an asset's carrying amount exceeds its recoverable amount (the higher of value in use (VIU) and fair value less costs of disposal (FVLCD)).
- IAS 36 requires an indicator assessment at every reporting date; goodwill and indefinite-life intangibles require an annual test regardless of indicators.
- Discount rates used in VIU calculations typically range from 8% to 15% pre-tax for European industrials, and small changes in the rate can swing the conclusion.
- Reversing an impairment loss is permitted for most assets but is prohibited for goodwill.
What is Impairment of Assets (IAS 36)?
A 2024 FRC thematic review found that 40% of sampled audit files had deficiencies in how teams tested impairment under IAS 36 . The most common failure was accepting management's discount rate without independent corroboration. At firms like ours, the running joke is that half the rates in the file are PIOOMA (pulled it out of my a$$) with a WACC label slapped on afterwards.
IAS 36.9 requires an entity to assess at each reporting date whether any indication exists that an asset may be impaired. External indicators include a decline in market value, adverse changes in the regulatory or economic environment, an increase in discount rates, or a drop in the entity's market capitalisation below net asset value. Internal indicators include evidence of obsolescence or physical damage, and internal reporting that shows an asset's economic performance is worse than expected. When an indicator exists (or for goodwill and indefinite-life intangible assets, at least annually), the entity measures the asset's recoverable amount.
Recoverable amount is the higher of fair value less costs of disposal (FVLCD) and value in use (VIU). VIU is a present value calculation: the entity projects future cash flows the asset is expected to generate and discounts them at a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the asset ( IAS 36.30 -57). If the carrying amount exceeds recoverable amount, the entity recognises an impairment loss in profit or loss (or against the revaluation surplus if the asset is carried under the revaluation model). ISA 540.13 (a) requires the auditor to evaluate whether the entity's method for estimating recoverable amount is appropriate before testing the inputs.
Worked example: Bergstrom Skog AB
Client: Swedish forestry and paper company, FY2025, revenue EUR 75M, IFRS reporter. Bergstrom operates a paper mill in Gavle acquired in 2019 for EUR 18M. The mill's carrying amount at 31 December 2025 is EUR 12.6M after accumulated depreciation. During 2025 the European paper market contracted, with benchmark pulp prices falling 22% from the prior year. Management identifies this as an external impairment indicator under IAS 36.12 (b).
Step 1: identify the cash-generating unit
The Gavle mill generates cash inflows largely independent of other Bergstrom assets. It is the CGU for testing purposes.
Documentation note: record the CGU identification and the rationale for treating the mill as a single CGU under IAS 36.66 , including the assets within scope (land, buildings, production equipment, allocated corporate assets under IAS 36.100 -102).
Step 2: determine value in use
Management projects five years of net cash flows from the mill, incorporating reduced pulp prices in years one and two (EUR 1.4M and EUR 1.6M), a gradual recovery in years three through five (EUR 2.0M, EUR 2.2M, EUR 2.3M), a terminal value using a 1.5% long-term growth rate, and a pre-tax discount rate of 11.2% derived from a weighted-average cost of capital (WACC) adjusted for asset-specific risk.
Documentation note: record each year's projected cash flow, the source of the pulp price assumptions (industry report from CEPI dated November 2025), the discount rate build-up, and the terminal growth rate justification per IAS 36.33 -56.
Step 3: calculate recoverable amount
Discounting the projected cash flows at 11.2% produces a VIU of EUR 14.1M. Management obtains an indicative broker valuation of the mill at EUR 10.8M (FVLCD). Recoverable amount is the higher figure: EUR 14.1M.
Documentation note: record both measurements and state that VIU exceeds FVLCD. File the broker valuation as supporting evidence for the alternative measure under IAS 36.18 .
Step 4: compare to carrying amount and conclude
The carrying amount of EUR 12.6M is below the recoverable amount of EUR 14.1M. No impairment loss is required.
Documentation note: record the headroom of EUR 1.5M (EUR 14.1M minus EUR 12.6M). Document a sensitivity analysis showing the discount rate at which VIU would equal carrying amount (approximately 13.4%). IAS 36.134 (f) requires disclosure of key assumptions and the amount by which a reasonably possible change would cause carrying amount to exceed recoverable amount.
The file should tell a story: cash flow projections that tie to the CEPI industry report, a discount rate build-up with sourced components, a sensitivity analysis that quantifies exactly how far the rate would need to move before the headroom disappears, and a clear statement of the CGU boundary.
Why it matters in practice
- Teams frequently apply a post-tax discount rate to post-tax cash flows and treat the result as a valid VIU calculation. IAS 36 .BCZ85 confirms that VIU must be calculated using pre-tax cash flows and a pre-tax discount rate. The PCAOB and FRC have both flagged this in inspection reports. Using a post-tax WACC without grossing up introduces a systematic error that can overstate or understate recoverable amount by 5% to 10%.
- Sensitivity analysis is often treated as optional. IAS 36.134 (f) requires disclosure when a reasonably possible change in a key assumption would cause carrying amount to exceed recoverable amount. ISA 540.18 requires the auditor to evaluate whether management's point estimate is reasonable given the range of outcomes. Omitting sensitivity analysis leaves the auditor without the range data needed to form that evaluation. Nobody enjoys re-running a model at three different discount rates under time pressure, but that's the difference between a file that survives review and one that doesn't.
Impairment of assets vs. depreciation
| Dimension | Impairment ( IAS 36 ) | Depreciation ( IAS 16 / IAS 38 ) |
|---|---|---|
| Purpose | Reduces carrying amount to recoverable amount when future economic benefits have declined below what the balance sheet reflects | Allocates the cost (or revalued amount) of an asset over its useful life on a systematic basis |
| Trigger | Indicator-driven assessment at each reporting date (annual for goodwill) | Automatic; begins when the asset is available for use and continues until derecognition |
| Reversibility | Reversible for all assets except goodwill ( IAS 36.110 ) | Not reversible; depreciation already recognised is not recalculated retrospectively |
| Measurement basis | Recoverable amount: higher of VIU and FVLCD | Depreciable amount: cost minus residual value, allocated by a chosen method (straight-line or declining balance, among others) |
| Audit focus | Cash flow projection assumptions and discount rate (plus CGU boundary) | Useful life estimate, residual value, method selection, consistency |
The distinction matters because an impairment test involves forward-looking estimates that fall squarely under ISA 540 , while depreciation is a mechanical allocation verified against the asset register. Confusing the two leads to over-reliance on management projections when auditing depreciation, or under-scrutiny of impairment assumptions by treating them as routine.
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Jurisdiction notes
IAS 36 impairment testing applies globally under IFRS. In the United Kingdom, the FRC has identified impairment of goodwill and intangible assets as a persistent area of audit deficiency, particularly around the auditor’s challenge of management’s discount rates and growth assumptions in VIU models. In the Netherlands, the AFM expects auditors to apply NV COS 540 (Revised) with sufficient scepticism when evaluating management’s impairment models, including sensitivity analysis on key assumptions. In Australia, ASIC has highlighted that auditors should critically evaluate management’s CGU identification and whether impairment indicators have been properly assessed under AASB 136.
In the United States, impairment testing follows ASC 350 (goodwill and indefinite-lived intangibles) and ASC 360 (long-lived assets), which differ from IAS 36 in several respects. US GAAP permits a qualitative assessment (“Step 0”) before quantitative testing for goodwill impairment, and goodwill impairment is measured as the excess of carrying amount over fair value of the reporting unit (a one-step test since ASU 2017-04). Auditors of SEC registrants apply PCAOB AS 2501 and AU-C 540 requirements for evaluating management’s impairment models. PCAOB inspection findings have frequently cited insufficient challenge of management’s discount rate assumptions and growth rate projections in fair value models. The SEC staff has also issued comment letters on goodwill impairment disclosures, setting expectations for the level of sensitivity analysis companies should provide.
Frequently asked questions
When do I have to test assets for impairment?
Test whenever an impairment indicator exists at the reporting date. For goodwill and indefinite-life intangible assets, IAS 36.10 requires an annual test regardless of indicators. The annual test can be performed at any time during the reporting period provided it is performed at the same time every year.
Can I reverse an impairment loss in a later period?
Yes, for all assets except goodwill. IAS 36.110 permits reversal when indicators suggest the impairment loss has decreased, but the reversal cannot increase the carrying amount above what it would have been (net of depreciation) had no impairment been recognised. IAS 36.124 prohibits reversal of goodwill impairment under any circumstances.
Does IAS 36 apply to right-of-use assets under IFRS 16?
Yes. IFRS 16.33 explicitly subjects right-of-use assets to IAS 36. The lessee tests the right-of-use asset for impairment when indicators exist, comparing its carrying amount to its recoverable amount following the same process used for owned property, plant, and equipment.