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IAS 36 is an International Accounting Standard issued by the International Accounting Standards Board (IASB) that outlines the procedures an entity must apply to ensure that its assets are carried at no more than their recoverable amount. [1] If an asset's carrying amount exceeds the amount to be recovered through use or sale, the asset is described as impaired and the standard requires the entity to recognize an impairment loss. [2]
The fundamental rule of IAS 36 is that an asset is impaired when its carrying amount (the value on the balance sheet) is higher than its recoverable amount. [3]
The recoverable amount is defined as the higher of two values: [4]
An entity must assess at each reporting date whether there is any indication that an asset may be impaired. [7] If such indications exist (e.g., significant fall in market value, obsolescence, or poor economic performance), a formal estimate of the recoverable amount is required. [8]
Regardless of indicators, the following must be tested for impairment annually: [9]
If it is not possible to estimate the recoverable amount for an individual asset (because the asset does not generate cash inflows that are largely independent), the entity identifies the smallest identifiable group of assets that generates independent cash inflows—this is known as a Cash-Generating Unit (CGU). [10]
Practical Example: The Retail Store (Example 1) A retail chain owns a specific store that uses a customized checkout system. The checkout system itself does not generate independent cash flows; the store as a whole does. Therefore, the store is the CGU. If the store's performance declines, the entire store’s assets (including the checkout system and the building) are tested for impairment together. [11]
An impairment loss is recognized immediately in profit or loss (unless the asset is carried at a revalued amount under another standard like IAS 16). [12]
| Priority | Target Asset | Reasoning |
|---|---|---|
| First | Goodwill | Goodwill is the most subjective asset and must be "written off" first. [13] |
| Second | Other assets in the CGU | The remaining loss is allocated on a pro-rata basis based on the carrying amounts. [14] |
Reversals: IAS 36 requires entities to assess whether an impairment loss recognized in prior years (except for goodwill) may no longer exist or may have decreased. If so, the loss is reversed. [15] Impairment losses recognized for goodwill can never be reversed. [16]
IAS 36 requires an entity to disclose information that enables users to evaluate the impairment losses recognized or reversed during the period and the key assumptions used to measure the recoverable amount of cash-generating units (CGUs). [17]
| Paragraph | Category | Disclosure Requirement | Description / Examples |
|---|---|---|---|
| IAS 36.126 | Recognized Amounts | Losses and Reversals | The amount of impairment losses (and reversals) recognized in profit or loss and the line items in which they are included. |
| IAS 36.129 | Segment Reporting | The amount of impairment losses recognized or reversed during the period for each reportable segment (if IFRS 8 is applicable). | |
| IAS 36.130 | Individual Assets | Nature of the Asset | For material individual assets or CGUs: the nature of the asset, the reportable segment, and whether the recoverable amount is fair value less costs of disposal (FVLCD) or value in use (VIU). |
| IAS 36.134(d) | CGUs with Goodwill | Key Assumptions | For CGUs with significant goodwill or intangible assets with indefinite lives: the key assumptions (e.g., sales volume, price changes) on which management based its cash flow projections. |
| IAS 36.134(d) | Growth and Discount Rates | The period over which management has projected cash flows, the growth rate used to extrapolate projections, and the discount rate(s) applied. | |
| IAS 36.134(f) | Sensitivity Analysis | If a reasonably possible change in a key assumption would cause the carrying amount to exceed the recoverable amount: the amount by which the recoverable amount exceeds the carrying amount. | |
| IAS 36.131 | Aggregated Info | Unallocated Impairment | Disclosure of the main classes of assets affected by impairment losses for which no individual disclosure is required. |