IAS 36 Impairment of Assets: Recoverable Amount, CGUs and Goodwill

Impairment is where optimism on the balance sheet meets reality. IAS 36 prevents companies from carrying assets at more than they can recover, forcing write-downs when value falls. For asset-heavy groups, impairment charges can dominate a year’s results. This guide explains the indicators, the recoverable amount calculation, cash-generating units, goodwill, and reversals.

When must you test for impairment?

IAS 36 requires an entity to assess at each reporting date whether there is any indication that an asset may be impaired. Indicators come from external sources — a fall in market value, adverse changes in the market or economy, rising interest rates — and internal sources, such as physical damage, obsolescence, or evidence that an asset is performing worse than expected. If any indicator exists, a full impairment test is performed.

Goodwill and indefinite-life intangibles are special: they must be tested at least annually regardless of whether indicators exist, because their value is not reduced by amortisation and could otherwise drift above recoverable amount unnoticed. This annual goodwill test is one of the most scrutinised areas in many audits, especially after acquisitions made at high prices.

How do you calculate recoverable amount?

Recoverable amount is the higher of two measures: fair value less costs of disposal, and value in use. Fair value less costs of disposal is what the asset could be sold for, net of disposal costs, based on market evidence. Value in use is the present value of the future cash flows expected from the asset’s continued use and eventual disposal, discounted at a rate reflecting current market assessments and the asset’s specific risks.

If either measure exceeds the carrying amount, the asset is not impaired and there is no need to compute the other. Where a test is needed, value in use calculations dominate in practice, and they hinge on cash flow forecasts and the discount rate — both highly judgmental. Small changes in growth assumptions or the discount rate can swing the conclusion between no impairment and a large write-down.

What is a cash-generating unit?

Many assets do not generate cash flows on their own — a single machine on a production line, for instance, produces no independent cash inflows. IAS 36 addresses this through the cash-generating unit (CGU): the smallest identifiable group of assets that generates cash inflows largely independent of other assets. When an individual asset cannot be tested alone, it is tested as part of its CGU.

Identifying CGUs is a critical judgment because it determines the level at which impairment is assessed and where impairment losses fall. Goodwill, which generates no cash flows independently, must be allocated to the CGUs or groups of CGUs expected to benefit from the acquisition that created it, and tested at that level. Getting CGU identification wrong can either hide impairments or trigger them inappropriately.

How is goodwill impairment different?

Goodwill receives special treatment because it cannot be sold separately and is not amortised. It is allocated to CGUs and tested annually by comparing the carrying amount of each CGU, including its allocated goodwill, with its recoverable amount. If the carrying amount exceeds recoverable amount, the impairment loss is applied first to goodwill, and only then pro rata to the other assets in the unit.

Crucially, goodwill impairment can never be reversed. Once written down, it stays down even if the business recovers, reflecting the view that any subsequent recovery represents internally generated goodwill, which cannot be recognised. This asymmetry makes goodwill impairment a permanent dent in equity and a closely watched signal that an acquisition has underperformed expectations.

When and how can impairments be reversed?

For assets other than goodwill, IAS 36 requires a reversal of a previously recognised impairment loss if there has been a change in the estimates used to determine recoverable amount — for example, a recovery in market conditions or improved performance. The reversal is limited so that the asset’s carrying amount does not exceed what it would have been, net of depreciation, had no impairment been recognised.

This reversibility is a notable difference from US GAAP, which prohibits reversals. It means IFRS balance sheets can recover as conditions improve, rather than being permanently marked down. For cyclical, asset-heavy industries such as energy and commodities, the ability to reverse impairments when prices recover is significant, and it ties back to the framework differences explored across our IFRS hub.

How do you build a credible value-in-use model?

The value-in-use calculation is the heart of most impairment tests, and its credibility rests on disciplined cash flow forecasting and an appropriate discount rate. Cash flow projections should be based on the most recent budgets and plans approved by management, typically covering up to five years, with a terminal value beyond that using a steady-state growth rate that does not exceed the long-term growth rate for the relevant market. Forecasts must exclude cash flows from future restructurings not yet committed and from enhancing the asset’s performance.

The discount rate is a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the asset or cash-generating unit, frequently derived from the entity’s weighted average cost of capital and adjusted for asset-specific risk. Because the conclusion is so sensitive to growth and discount assumptions, the model should be internally consistent, evidenced, and stress-tested. Auditors routinely compare prior-year forecasts against actual results, so a track record of over-optimism quickly erodes the model’s credibility.

What impairment disclosures does IAS 36 require?

IAS 36 requires extensive disclosure so users can understand the impairment assessments. For each material impairment loss or reversal, the entity discloses the amount, the events and circumstances that led to it, and the cash-generating unit affected. For goodwill and indefinite-life intangibles, the standard requires disclosure of the carrying amount allocated to each unit, the basis on which recoverable amount was determined, the key assumptions, and a sensitivity analysis where a reasonably possible change in a key assumption would cause an impairment.

These disclosures are demanding and closely read, particularly the sensitivity analysis around goodwill, which signals how much headroom exists before a write-down. Preparing them thoroughly is not just compliance — it is an opportunity to demonstrate the robustness of the impairment process to investors and lenders, reinforcing the transparency theme that runs through our IFRS hub.

How does impairment interact with cyclical and commodity businesses?

For cyclical and commodity-exposed businesses — energy, mining, shipping — impairment is a recurring and material feature of reporting. When prices fall, value-in-use models reflect lower expected cash flows and impairments follow; when prices recover, the IFRS ability to reverse impairments (except goodwill) allows carrying amounts to rebound. This produces a more responsive balance sheet than US GAAP, which prohibits reversals, but it also introduces earnings volatility tied to the commodity cycle.

Managing this requires disciplined, consistent assumptions across the cycle rather than optimism at the top and panic at the bottom. The discount rate, long-term price assumptions, and production forecasts should be grounded in evidence and applied consistently, so that impairments and reversals reflect genuine changes in recoverable amount rather than shifting management sentiment. For energy groups operating across multiple jurisdictions, this consistency is essential to credible reporting, in line with the standards explored across our IFRS hub.

How should impairment governance be structured?

Because impairment is material and judgmental, it warrants formal governance. Leading practice is to define the methodology for identifying cash-generating units and computing recoverable amount, to approve the key assumptions — growth rates, discount rates, long-term prices — at a senior level, and to review the impairment conclusions through a committee before they reach the financial statements. The process should produce documentation that an auditor can follow without bespoke explanation.

For groups, governance also means consistency: the same CGU logic, assumption-setting process, and methodology applied across entities, so the consolidated impairment position is coherent. This institutional discipline turns impairment from an annual scramble into a controlled process and gives stakeholders confidence that asset values are genuinely supportable, reflecting the controls culture emphasised throughout our IFRS hub.

Why is impairment a key signal for investors?

Impairment charges are among the most closely watched signals in financial reporting because they reveal when management’s earlier expectations have not been met. A goodwill impairment, in particular, is read as an admission that an acquisition has underperformed the price paid for it, and large impairments can move share prices and trigger questions about capital allocation. The timing and size of impairments therefore carry information well beyond the accounting entry itself.

For this reason, the credibility of the impairment process matters to the market. Companies that test rigorously, disclose key assumptions and sensitivities transparently, and recognise impairments promptly earn analytical trust; those that appear to delay or understate impairments lose it. Treating impairment as an honest reflection of recoverable value, communicated clearly, is part of credible reporting, reflecting the transparency theme that runs through our IFRS hub.

How does timing affect impairment recognition?

The timing of impairment recognition is itself a judgment with real consequences. IAS 36 requires an assessment for indicators at each reporting date, which means impairment can arise at an interim reporting date as well as at year-end. An impairment recognised at an interim date for goodwill, notably, cannot be reversed in a later interim or annual period of the same year, which makes the interim assessment consequential and not merely provisional.

Recognising impairment promptly when indicators emerge — rather than deferring in the hope of recovery — is essential to faithful representation and to maintaining credibility with auditors and investors. Delayed impairment overstates assets and defers bad news, which markets tend to penalise more heavily when it eventually surfaces. Timely, evidence-based recognition is the disciplined approach, consistent with the rigour emphasised throughout our IFRS hub.

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