A machine sits in the statement of financial position at ₦300,000. A new competitor arrives and sales of its product collapse. The machine will never earn ₦300,000 for the company. Should the books still say ₦300,000? International Accounting Standard (IAS) 36, Impairment of Assets, says no: an asset must not be carried at more than the amount the company can recover from using or selling it.
When it is, the asset is written down and the loss is charged to profit.
This topic covers the objective and scope, how to spot impairment, the two ways of measuring recoverable amount (fair value less costs of disposal and value in use), the rules for estimating cash flows and the discount rate, accounting for the loss (including on revalued assets), later depreciation, reversals and disclosure. The next topic covers cash-generating units and goodwill.
November 2025 Question 2 carried 20 marks on impairment and tested both a single-asset test and a reversal scenario.
In 30 seconds
An asset is impaired when its carrying amount is more than its recoverable amount. Recoverable amount is the higher of fair value less costs of disposal and value in use (the present value of the cash flows from using the asset and selling it at the end). At each reporting date, look for indicators. If there is one, calculate recoverable amount.
If it is lower than carrying amount, write the asset down and charge the loss to profit or loss, or to other comprehensive income to the extent of a revaluation surplus on the same asset. Then depreciate the new carrying amount over the remaining life. Goodwill and indefinite-life intangibles are tested every year whether or not there is an indicator.
Losses on assets other than goodwill can be reversed if the estimates change, but never above what the carrying amount would have been without the impairment. Goodwill losses are never reversed. If the recoverable amount is higher than the carrying amount, there is no impairment, even if the replacement price has fallen.
Key terms in plain English
| Term | What it means |
|---|---|
| Carrying amount | What the asset is shown at: cost or valuation less depreciation and impairment |
| Recoverable amount | The higher of fair value less costs of disposal and value in use |
| Fair value less costs of disposal (FVLCD) | What the asset could be sold for in an orderly transaction, minus the direct costs of selling |
| Value in use (VIU) | The present value of the cash flows expected from using the asset and from its final disposal |
| Impairment loss | The amount by which carrying amount exceeds recoverable amount |
| Cash-generating unit | The smallest group of assets that earns cash inflows largely independent of other assets (next topic) |
Syllabus check
IAS 36 is examinable at this level. The syllabus and chapter outcomes ask you to identify and evaluate indicators, determine recoverable amount, recognise and reverse losses, prepare the disclosures and explain how impairment affects profit, equity, earnings per share, return on capital employed (ROCE), covenants and valuation ratios. This topic covers:
- B2(a) and (b) how recognition and measurement affect non-financial assets and appraising their treatment;
- D1(a) and (b) assessing whether the policy applied is appropriate and valid;
- the effect of impairment on the ratios (Area D, item 2).
CAMA 2020 and impairment
The Companies and Allied Matters Act 2020 (CAMA 2020) requires statements that follow International Financial Reporting Standards (IFRS) and give a true and fair view.
| Section | What it says | Link to IAS 36 |
|---|---|---|
| s. 377(1) and s. 378 | Directors prepare the statements, which follow IFRS and give a true and fair view | An asset above its recoverable amount overstates the position |
| s. 374(1) | The company keeps accounting records that explain its transactions | Cash flow forecasts and valuations need support |
| s. 404(7) | The audit committee reviews accounting policies and internal control | It can challenge the assumptions in impairment tests |
| s. 407(3) | The auditor has a right of access to books, accounts and vouchers | Used to test forecasts, rates and indicators |
Objective and scope
The objective is to make sure assets are carried at no more than recoverable amount. IAS 36 applies to all assets except those covered by other standards: inventories (IAS 2), deferred tax assets (IAS 12), financial assets (IFRS 9), investment property at fair value (IAS 40), non-current assets held for sale (IFRS 5), biological assets at fair value less costs to sell (IAS 41) and insurance contract assets.
An impairment is a permanent loss in value, not a temporary dip.
Identifying impairment
At the end of each reporting period the entity assesses whether there is any indication of impairment. If so, it estimates recoverable amount. IAS 36 requires at least these sources to be considered:
| External | Internal |
|---|---|
| The asset’s value has fallen much more than expected; adverse changes in technology, market, economic or legal environment; market interest rates have risen, raising the discount rate; the entity’s net assets are above its market capitalisation | Evidence of obsolescence or physical damage; the asset is idle or to be disposed of early, or restructuring is planned; the asset’s economic performance is worse than expected |
The following must be tested at least annually even with no indicator: goodwill acquired in a business combination, and intangible assets with an indefinite useful life (and intangibles not yet available for use).
Measuring recoverable amount
Recoverable amount is the higher of fair value less costs of disposal (FVLCD) and value in use (VIU). If either is above carrying amount, there is no impairment, and the other need not be calculated.
Fair value less costs of disposal
Fair value is the price that would be received to sell the asset in an orderly transaction between market participants (normally market value). Costs of disposal are direct selling costs such as legal fees and taxes. Redundancy and reorganisation costs are not.
Value in use
VIU is the present value of the future cash flows expected from the asset, including its disposal at the end of its life. Estimate the flows and discount them.
- Cash flows are based on reasonable, supportable assumptions that represent management’s best estimate of conditions over the remaining life, giving more weight to external evidence, and normally using recent budgets covering a limited period.
- Include cash inflows from continuing use, outflows needed to generate them (including those to prepare the asset for use) and net cash from final disposal.
- Exclude financing cash flows, income tax receipts and payments, and cash flows from future restructuring not yet committed or from improving or enhancing the asset’s performance.
- Discount rate is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset, for which cash flow estimates have not been adjusted. It is the return the market would expect from an equally risky investment.
Accounting for an impairment loss
- Assess for indicators.
- If found, estimate recoverable amount.
- If recoverable amount is lower than carrying amount, write down the asset to it. The write-down is the impairment loss.
The loss is recognised immediately in profit or loss. But if the asset is carried at a revalued amount, the loss is treated as a revaluation decrease: it goes to other comprehensive income to the extent of the revaluation surplus on that same asset, and the rest to profit or loss. After an impairment, depreciation is based on the revised carrying amount, less residual value, over the remaining useful life.
Reversal of an impairment loss
At each reporting date the entity assesses whether a loss recognised in earlier periods (other than on goodwill) no longer exists or has decreased. If the estimates used have changed, the loss is reversed, so long as the carrying amount does not exceed what it would have been, net of depreciation, if no impairment had been recognised.
The reversal goes to profit or loss, unless the original loss was charged to the revaluation surplus, in which case the reversal goes to the surplus through other comprehensive income. Depreciation is adjusted for future periods. An impairment loss on goodwill is never reversed, because a recovery is more likely to be internally generated goodwill, which cannot be recognised.
Disclosure
For each class of asset: the impairment losses and reversals recognised in profit or loss and the line item; those recognised in other comprehensive income. For a material loss or reversal: the events that led to it, the amount, the nature of the asset, whether recoverable amount is FVLCD or VIU and how it was determined (including the discount rate used).
For cash-generating units with goodwill or indefinite-life intangibles there are extensive disclosures, including sensitivity to reasonably possible changes in key assumptions.
The rules in more depth
Why the higher of two measures
An owner can either keep using the asset or sell it. A rational owner chooses whichever gives more. So the amount that can be recovered is the greater.
Why financing and tax are left out of value in use
Financing is reflected in the discount rate and taxes are dealt with through a pre-tax rate. Putting them in the cash flows would count them twice.
Why replacement price is not the test
If the supplier now sells the same equipment for less, that alone does not show an impairment. What matters is what this asset can recover through its own cash flows or sale.
Effect on the ratios
An impairment reduces profit, equity and earnings per share in the year, and can breach loan covenants. Afterwards, because assets are lower, depreciation is lower and return on capital employed can rise, which is why impairment is sometimes used in big bath accounting.
Worked examples
Example 1: the test. A machine is carried at ₦300,000. Future cash flows from sales of its product are ₦150,000, ₦100,000 and ₦50,000 over three years, and it is then sold for ₦25,000. An offer of ₦240,000 has been received, with ₦5,000 shipping costs. The discount rate is 10%. The figures are illustrative.
- FVLCD.
₦240,000 − ₦5,000 = ₦235,000. - VIU:
150,000 ÷ 1.10 = 136,364
100,000 ÷ 1.10² = 82,645
(50,000 + 25,000) ÷ 1.10³ = 56,349.
Total = ₦275,358. - Recoverable amount = the higher = ₦275,358.
- Impairment loss.
₦300,000 − ₦275,358 = ₦24,642, debited to profit or loss.
Example 2: revalued asset. The same machine includes a revaluation surplus of ₦20,000. The loss is ₦24,642.
- ₦20,000 is charged to other comprehensive income, against the surplus.
- The remaining ₦4,642 is charged to profit or loss.
Example 3: an impairment and depreciation. Entity Q buys a machine on 1 January Year 1 for ₦240,000 with a 20-year life and no residual value. On 1 January Year 4 the recoverable amount is ₦100,000 and the remaining life 10 years.
- Carrying amount at 31 December Year 3 = ₦240,000 − 3 × ₦12,000 = ₦204,000.
- Impairment loss.
₦204,000 − ₦100,000 = ₦104,000 in profit or loss. - Year 4 depreciation = ₦100,000 ÷ 10 = ₦10,000.
Example 4: no impairment despite a lower replacement price. A subsidiary bought equipment for ₦8 million on 31 December 2020 and depreciates it at 25% straight line. The supplier now sells the same equipment for ₦5 million. At 31 December 2021 the expected cash flows are ₦2.6m, ₦4.4m and ₦4.6m over the next three years, nil residual value, discount rate 10%.
The directors estimate fair value less costs of disposal at ₦4 million and propose to write the asset down to ₦5 million.
- Carrying amount.
₦8m − ₦2m = ₦6 million. - VIU = 2.6 × 0.909 + 4.4 × 0.826 + 4.6 × 0.751 = 2.363 + 3.634 + 3.455 = ₦9.452 million.
- Recoverable amount = higher of ₦4m and ₦9.452m = ₦9.452m, which is above carrying amount. No impairment.
- The supplier’s lower price is not an impairment test, and the proposed write-down to ₦5m would be wrong. It would wrongly reduce profit and capital employed.
Example 5: a reversal. Continue Example 3. At 31 December Year 5, recoverable amount is ₦150,000 and carrying amount is ₦80,000 (₦100,000 less two years at ₦10,000).
- Carrying amount if no impairment had been recognised.
₦240,000 − 5 × ₦12,000 = ₦180,000.
This is the cap. - Recoverable amount ₦150,000 is below the cap, so the carrying amount can rise to ₦150,000.
- Reversal = ₦150,000 − ₦80,000 = ₦70,000 credited to profit or loss.
Depreciation is then recalculated over the remaining life.
Section 374(1) of CAMA 2020 requires the supporting forecasts and valuations to be kept.
How to score full marks
- Calculate carrying amount first, including depreciation to the test date.
- Compute both measures if the higher is not obvious, and state recoverable amount as the higher.
- In value in use, discount factors and the final disposal proceeds carry marks. Leave out tax and financing.
- State the entry: debit profit or loss, credit the asset, or other comprehensive income first if there is a surplus.
- Recalculate depreciation on the new carrying amount over the remaining life.
- For reversals, compute the cap and say that goodwill losses are never reversed.
- If asked about ratios, link the loss to profit, equity, earnings per share, ROCE and covenants.
Common mistakes in the exam
- Writing the asset down to the replacement price or the lower of the two measures.
- Using only fair value, or only value in use, when the other is higher.
- Including tax or financing flows in value in use.
- Forgetting the final disposal proceeds.
- Charging the loss to profit or loss when there is a revaluation surplus on the same asset.
- Forgetting to change depreciation after the impairment.
- Reversing above the carrying amount that would have existed without impairment, or reversing goodwill.
Quick revision
- Impaired: carrying amount above recoverable amount. Recoverable amount: higher of FVLCD and VIU.
- Test at each reporting date if an indicator exists. Test goodwill and indefinite-life intangibles every year.
- VIU: supportable cash flows, pre-tax market rate, include disposal proceeds, exclude tax, financing and uncommitted restructuring.
- Loss: profit or loss, or other comprehensive income up to a revaluation surplus. Then depreciate the new amount.
- Reversal: allowed (not goodwill), capped at the carrying amount had there been no impairment.
- CAMA 2020: ss. 377(1), 378, 374(1), 404(7), 407(3).
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Recall check: multiple choice
The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.
Question 1. Recoverable amount is:
- The lower of fair value less costs of disposal and value in use
- The higher of fair value less costs of disposal and value in use
- Cost less depreciation
- Replacement cost
Show the answer
B. If either exceeds carrying amount there is no impairment.
Question 2. Which of the following must be tested for impairment every year even with no indicator?
- Machinery
- Goodwill acquired in a business combination
- Motor vehicles
- Inventory
Show the answer
B. Also indefinite-life intangibles.
Question 3. Which of the following is excluded from value in use?
- Cash inflows from continuing use
- Income tax payments
- Net cash from final disposal
- Costs to generate the inflows
Show the answer
B. Financing flows are also excluded.
Question 4. The discount rate in value in use is:
- A post-tax rate
- A pre-tax market rate reflecting risks specific to the asset
- Zero
- The dividend rate
Show the answer
B. It is the return the market would expect from an equally risky investment.
Question 5. An impairment loss on an asset with a revaluation surplus is charged first to:
- Profit or loss
- Other comprehensive income, up to the surplus on that asset
- Retained earnings
- Share capital
Show the answer
B. The excess goes to profit or loss.
Question 6. A carrying amount of ₦204,000 and recoverable amount of ₦100,000 give an impairment loss of:
- ₦100,000
- ₦104,000
- ₦204,000
- ₦304,000
Show the answer
B. ₦204,000 − ₦100,000.
Question 7. After an impairment, depreciation is based on:
- The original cost
- The revised carrying amount over the remaining useful life
- Fair value
- Nil
Show the answer
B. The residual value is deducted.
Question 8. A reversal of an impairment loss (other than goodwill) is limited to:
- The recoverable amount
- The carrying amount that would have existed had there been no impairment
- Twice the loss
- Nil
Show the answer
B. It is recognised in profit or loss.
Question 9. An impairment loss on goodwill:
- Is reversed when markets recover
- Is never reversed
- Is reversed after five years
- Is ignored
Show the answer
B. Any recovery is likely to be internally generated goodwill.
Question 10. Which section of CAMA 2020 requires the statements to follow IFRS and give a true and fair view?
- Section 378
- Section 394
- Section 402
- Section 409
Show the answer
A. IAS 36 is part of IFRS.
Written questions
Question 11 (10 marks). (a) State five indicators of impairment, split between external and internal. (5 marks) (b) Define recoverable amount and explain how value in use is measured. (5 marks)
Question 12 (20 marks). (a) State the assets outside the scope of IAS 36. (3 marks) (b) Describe the stages in accounting for an impairment loss. (3 marks) (c) State which cash flows are included in and excluded from value in use, and the discount rate. (4 marks) (d) A subsidiary bought equipment for ₦8m on 31 December 2020 and depreciates it at 25% straight line.
At 31 December 2021 the expected cash flows are ₦2.6m, ₦4.4m and ₦4.6m over three years, with a discount rate of 10% (factors 0.909, 0.826, 0.751). Fair value less costs of disposal is ₦4m. The directors propose to write it down to the supplier’s new price of ₦5m. Evaluate. (6 marks) (e) Explain the accounting for an impairment loss on an asset with a revaluation surplus. (4 marks)
Question 13 (10 marks). Entity Q buys a machine on 1 January Year 1 for ₦240,000 with a 20-year life and no residual value. On 1 January Year 4 recoverable amount is ₦100,000 and remaining life 10 years. (a) Calculate the carrying amount at 31 December Year 3. (2 marks) (b) Calculate the impairment loss. (2 marks) (c) Calculate Year 4 depreciation. (2 marks) (d) At 31 December Year 5 recoverable amount is ₦150,000. Calculate any reversal and state where it goes. (4 marks)
Model answers
Show the model answer to Question 11
(a) Indicators (5 marks). External (any three):
- a large fall in the asset’s value
- adverse changes in technology, market, economy or law
- higher market interest rates
- net assets above market capitalisation
Internal (any two): obsolescence or physical damage; idle asset or planned disposal or restructuring; worse economic performance than expected. (1 each)
(b) Recoverable amount (5 marks). Recoverable amount is the higher of fair value less costs of disposal and value in use. (1.5) Value in use is the present value of the cash flows from using the asset and its final disposal. (1) Cash flows are management’s best supportable estimates, (1) discounted at a pre-tax market rate that reflects the risks specific to the asset. (1.5)
Show the model answer to Question 12
(a) Exclusions (3 marks, any three at 1). Inventories. Deferred tax assets. Financial assets. Investment property at fair value. Assets held for sale. Biological assets at fair value less costs to sell. Insurance contract assets.
(b) Stages (3 marks). Establish whether there is an indication of impairment. (1) If so, assess recoverable amount. (1) Write the asset down to recoverable amount if lower, with the loss in profit or loss (or other comprehensive income against a surplus). (1)
(c) Value in use inputs (4 marks). Include inflows from use, outflows needed to generate them and net disposal proceeds. (1.5) Exclude financing flows, income tax flows and uncommitted restructuring or enhancement. (1.5) Use a pre-tax market rate reflecting asset-specific risk. (1)
(d) Equipment (6 marks).
- Carrying amount.
₦8m − ₦2m = ₦6m. (1) - VIU = 2.363 + 3.634 + 3.455 = ₦9.452m. (2)
- Recoverable amount is the higher of ₦4m and ₦9.452m, which is above carrying amount, so no impairment. (2)
- The supplier’s lower price is not an impairment test, so the write-down to ₦5m is wrong and there is no effect on ROCE. (1)
(e) Revalued asset (4 marks). The loss is treated as a revaluation decrease. (1) It is charged to other comprehensive income up to the revaluation surplus on that asset. (1.5) Any excess is charged to profit or loss. (1) Depreciation is then based on the new carrying amount. (0.5)
Show the model answer to Question 13
(a) Carrying amount (2 marks). ₦240,000 − 3 × ₦12,000 = ₦204,000. (2)
(b) Impairment (2 marks). ₦204,000 − ₦100,000 = ₦104,000, charged to profit or loss. (2)
(c) Depreciation (2 marks). ₦100,000 ÷ 10 = ₦10,000. (2)
(d) Reversal (4 marks).
- Carrying amount at 31 December Year 5 = ₦100,000 − 2 × ₦10,000 = ₦80,000.
- Cap = ₦240,000 − 5 × ₦12,000 = ₦180,000. (2)
- Recoverable amount ₦150,000 is below the cap, so the reversal is ₦150,000 − ₦80,000 = ₦70,000, credited to profit or loss. (2)
Pathfinder on IAS 36 impairment of assets
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
The marking guide gives 3 marks for carrying amount, 1 for recoverable amount, 2 for the adjustments and 6 for the effect on ROCE. The solution finds value in use of ₦9.452 million against carrying amount of ₦6 million, so there is no impairment and no effect on ROCE, and the directors’ proposal to write down to ₦5 million is wrong. Worked example 4 uses these numbers. The examiners reported that few candidates attempted the question and the performance was very poor.
Revise first: Measuring recoverable amount
Plant of ₦15 million bought on 1 January 2024 had a carrying amount of ₦12 million at 31 December 2024 and value in use of about ₦23.39 million, so there was no impairment to reverse and no government compensation to recognise. Note: the Pathfinder solution writes the total as ₦23.89 million in one line and ₦23.39 million in the next. The correct total of the discounted flows is ₦23.39 million, which is what we use. Practice question 13 covers the reversal rule.
Revise first: Accounting for an impairment loss
Source: ICAN Pathfinder, Strategic Business Reporting. Diets covered: November Diet, 2025 and May Diet, 2026.
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