An asset should never be carried at more than the entity can get back from it. If a machine has been damaged, a market has collapsed or a product has failed, the amounts in the books may be more than the asset can now earn or fetch. International Accounting Standard (IAS) 36 Impairment of Assets makes sure that assets are carried at no more than their recoverable amount.
This topic covers what recoverable amount is and how it is measured, the signs that call for a test, how an impairment loss is recorded, what happens to later depreciation, and when a loss can be reversed. The next topic covers cash-generating units and the impairment of goodwill.
The topic is examined directly. In May Diet, 2022, part (c) of Question 2 asked for statement of financial position extracts and notes in which a software licence had to be amortised and then written down to a lower recoverable amount. Read measurement after recognition, amortisation and disclosure first.
In 30 seconds
An asset is impaired when its carrying amount exceeds 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 disposing of it). At each reporting date the entity looks for indicators; if there is one, it estimates recoverable amount.
Goodwill, intangibles with indefinite lives and intangibles not yet available for use are tested every year. The impairment loss goes to profit or loss, or to other comprehensive income to the extent of a revaluation surplus on the same asset. Later depreciation uses the lower carrying amount.
A loss on any asset other than goodwill can be reversed, but only up to the carrying amount the asset would have had without the loss.
Objective and scope
An asset is carried at no more than its recoverable amount. Where its carrying amount is higher, it is impaired and written down. A temporary fall in market value is not necessarily an impairment, because the situation may change.
IAS 36 applies to all assets except those covered by other standards, including inventories (IAS 2), deferred tax assets (IAS 12), financial assets (International Financial Reporting Standard (IFRS) 9), contract assets and costs of obtaining contracts (IFRS 15), investment property at fair value (IAS 40) and non-current assets held for sale (IFRS 5).
Recoverable amount
The recoverable amount of an asset is the higher of its fair value less costs of disposal and its value in use. If either figure is above the carrying amount, there is no impairment, so it is not always necessary to find both. An impairment loss is the amount by which the carrying amount of an asset, or of a cash-generating unit, exceeds its recoverable amount.
Fair value less costs of disposal
Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. It is normally market value. If there is no active market, the entity estimates what it could obtain. Costs of disposal are direct selling costs: legal costs, taxes and the costs of getting the asset ready for sale.
Redundancy and reorganisation costs after a disposal are not direct selling costs.
Value in use
Value in use is the present value of the future cash flows expected from the asset, including those from its final disposal. It is found by estimating those cash flows and discounting them. The estimates rest on reasonable and supportable assumptions that represent management’s best estimate of the economic conditions over the remaining life.
The discount rate is a pre-tax rate that reflects the market’s assessment of the time value of money and the risks specific to the asset, the rate of return investors would require from an equally risky investment. The cash flows or the rate are adjusted for uncertainty, so risk is counted once. The cash flows exclude financing costs and tax payments.
Looking for indicators
At the end of each reporting period the entity asks whether any indication of impairment exists. If one does, it estimates the recoverable amount. IAS 36 requires at least the following to be considered.
| External sources | Internal sources |
|---|---|
| An unexpected fall in the asset’s market value | Evidence that the asset is damaged or obsolete, or no longer of use to the entity |
| Significant adverse changes in technology, markets, the economy or the law | Plans to discontinue or restructure the operation in which the asset is used |
| A rise in interest rates that lowers the asset’s value in use | A reduction in the asset’s expected remaining useful life |
| The carrying amount of the entity’s net assets exceeds its market capitalisation | Evidence that the asset’s performance is, or will be, worse than expected |
Assets tested every year
Three kinds of asset are tested for impairment at least annually, even with no indication: an intangible asset with an indefinite useful life, an intangible asset not yet available for use, and goodwill acquired in a business combination. Plant, buildings and other assets are tested only when there is an indication.
Accounting for an impairment loss
- Assets carried at cost. The asset is written down to its recoverable amount and the loss is recognised immediately in profit or loss. Dr Profit or loss, Cr Asset (or accumulated impairment).
- Revalued assets. The loss is treated as a revaluation decrease. It is recognised in other comprehensive income to the extent of the revaluation surplus on the same asset, and any balance goes to profit or loss.
- Later depreciation or amortisation. It is based on the revised carrying amount, less any residual value, over the remaining useful life, which is revised if necessary.
Reversal
At each reporting date the entity checks whether an earlier impairment loss on an asset other than goodwill has reversed. If the estimates have changed, the carrying amount is increased to the new recoverable amount, but not above the carrying amount the asset would have had, net of depreciation, if no impairment loss had been recognised.
The reversal goes to profit or loss, or to other comprehensive income for a revalued asset. A goodwill impairment loss is never reversed.
Disclosure
For each class of asset, the notes give the impairment losses and reversals recognised in profit or loss and the line item they are in, and those recognised in other comprehensive income.
The ideas in more depth
Why use the higher of the two measures
An entity can recover an asset’s carrying amount by using it or by selling it, and it will choose the better route. The asset is therefore worth at least the higher of the two. It is impaired only if both routes yield less than the carrying amount.
Why reversals are capped
Without a cap, an entity could write up an asset above what its cost, less normal depreciation, would have been, and that would be an unrecognised revaluation upwards by another route. The cap keeps a reversal to the loss that has been recovered.
Sources and references
- IAS 36 Impairment of Assets: objective and scope, indicators, recoverable amount, recognition of loss, reversal and disclosure.
- IAS 2 Inventories, IAS 12 Income Taxes, IAS 40 Investment Property, IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, which cover assets outside IAS 36.
These points are stated as at 5 November 2026.
Worked examples
Example 1: recoverable amount. A machine with a carrying amount of ₦500,000 is hit by a new competitor. Expected net cash flows are ₦200,000, ₦180,000 and ₦140,000 in the next three years, and the machine will then be scrapped for ₦nil. A buyer offers ₦380,000 now and the selling costs would be ₦10,000. The discount rate is 12%. Required: the recoverable amount and the impairment loss.
- Fair value less costs of disposal.
₦380,000 − ₦10,000 = ₦370,000. - Value in use.
₦200,000 ÷ 1.12 = ₦178,571
₦180,000 ÷ 1.12² = ₦143,495
₦140,000 ÷ 1.12³ = ₦99,649.
Total ₦421,715. - Recoverable amount. The higher of ₦370,000 and ₦421,715 is ₦421,715.
- Loss.
₦500,000 − ₦421,715 = ₦78,285, Dr Profit or loss, Cr Machine.
Example 2: a revalued asset. A factory has a carrying amount of ₦600,000 and a revaluation surplus of ₦120,000 relating to it. Its recoverable amount is ₦420,000. Required: the treatment of the loss.
- Loss.
₦600,000 − ₦420,000 = ₦180,000. - Other comprehensive income. ₦120,000, to the extent of the surplus.
- Profit or loss.
₦180,000 − ₦120,000 = ₦60,000.
Example 3: a licence. A licence cost ₦1,500 million, has a 10-year life with nil residual value and is available from 1 January 20X5. At 31 December 20X7 its recoverable amount is ₦700 million. Required: the loss and the 20X8 charge.
- Carrying amount.
₦1,500m ÷ 10 × 3 = ₦450m amortised, so carrying amount ₦1,050m. - Loss.
₦1,050m − ₦700m = ₦350m to profit or loss. - 20X8 amortisation. ₦700m over the remaining 7 years = ₦100m.
Example 4: a reversal. An asset cost ₦1,000 and has a 10-year life with nil residual value. After four years (carrying amount ₦600) it is impaired to a recoverable amount of ₦360. Two years later the recoverable amount has risen to ₦450. Required: the reversal.
- Loss.
₦600 − ₦360 = ₦240.
New annual charge ₦360 ÷ 6 = ₦60. - Carrying amount two years later.
₦360 − 2 × ₦60 = ₦240. - Cap.
With no impairment, after six years the carrying amount would be ₦1,000 − 6 × ₦100 = ₦400. - Reversal.
The recoverable amount of ₦450 is above the cap, so the asset is raised only to ₦400, a reversal of ₦400 − ₦240 = ₦160 in profit or loss, not ₦210.
How to answer in the exam
- Define. Give recoverable amount, fair value less costs of disposal and value in use in one line each.
- List indicators. Group them as external and internal, and give at least four.
- Calculate. Write both measures, choose the higher, then compare with the carrying amount. Always depreciate or amortise to the date of the test first.
- Account for the loss. Say profit or loss, or other comprehensive income to the extent of a surplus, and give the entries.
- Reversal. State the cap: the carrying amount had no loss been recognised, net of depreciation.
Common mistakes in the exam
- Using the lower of fair value less costs of disposal and value in use. Recoverable amount is the higher.
- Testing the asset before charging the year’s depreciation.
- Deducting selling costs from value in use, or using fair value without deducting costs of disposal.
- Taking the whole loss to profit or loss when a revaluation surplus exists on the asset.
- Reversing a loss up to the recoverable amount, ignoring the cap, or ignoring the depreciation after the impairment.
- Reversing a goodwill impairment loss.
Quick revision
- Impairment: carrying amount above recoverable amount. Recoverable amount: higher of fair value less costs of disposal and value in use.
- Indicators each reporting date; annual test for goodwill, indefinite-life intangibles and intangibles not yet available for use.
- Loss: profit or loss; OCI to extent of surplus for revalued assets. Depreciate the new carrying amount.
- Reversal: allowed except for goodwill; capped at the carrying amount without the loss.
- Value in use: pre-tax discount rate; exclude financing and tax cash flows.
Practice questions
These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.
Recall check: multiple choice
Question 1. The recoverable amount of an asset is:
- The lower of fair value less costs of disposal and value in use
- Its fair value
- The higher of fair value less costs of disposal and value in use
- Its original cost
Show the answer
C. The entity will recover the asset by the better route.
Question 2. An impairment loss on an asset carried at cost is recognised in:
- Profit or loss
- Other comprehensive income
- Equity directly
- Retained earnings
Show the answer
A. It is recognised immediately in profit or loss.
Question 3. Which of the following must be tested for impairment at least annually even without an indication?
- Plant and equipment
- Inventory
- Trade receivables
- Goodwill and intangibles with indefinite lives
Show the answer
D. Also intangibles not yet available for use.
Question 4. Value in use is:
- The fair value of the asset
- The present value of the cash flows expected from using the asset and disposing of it
- The original cost
- The replacement cost
Show the answer
B. It is a discounted cash flow figure.
Question 5. An impairment loss is:
- Recoverable amount less carrying amount
- Fair value less cost
- The amount by which the carrying amount exceeds the recoverable amount
- Cost less fair value
Show the answer
C. It arises only when the carrying amount is higher.
Question 6. After an impairment loss, future depreciation is based on:
- The revised carrying amount over the remaining useful life
- The original cost
- The fair value at purchase
- Nothing, because depreciation stops
Show the answer
A. The lower carrying amount is spread over the remaining life.
Question 7. An impairment loss on a revalued asset is recognised first in:
- Profit or loss
- Retained earnings
- Nowhere
- Other comprehensive income, to the extent of the revaluation surplus on that asset
Show the answer
D. The balance goes to profit or loss.
Question 8. An impairment loss on goodwill:
- May be reversed in full
- May never be reversed
- May be reversed by half
- Is recognised in other comprehensive income
Show the answer
B. Goodwill impairment is never reversed.
Question 9. A reversal of an impairment loss on an asset other than goodwill is limited to:
- Its fair value
- Its cost
- The carrying amount it would have had, net of depreciation, if no loss had been recognised
- Its recoverable amount
Show the answer
C. That cap stops an unrecognised revaluation.
Question 10. Which of the following is an indicator of impairment?
- The carrying amount of net assets exceeds the entity’s market capitalisation
- A rise in profit
- The appointment of a new director
- A cut in the tax rate
Show the answer
A. It suggests the assets are carried above their worth.
Section B style: written questions
Question 11 (10 marks). (a) Define recoverable amount, fair value less costs of disposal and value in use. (3 marks) (b) State FOUR indicators of impairment. (4 marks) (c) State the assets that must be tested for impairment every year. (3 marks)
Question 12 (15 marks). Ikeja Packaging has a machine with a carrying amount of ₦900,000 after the current year’s depreciation. It expects net cash flows of ₦350,000, ₦300,000 and ₦250,000 in the next three years, plus ₦60,000 from scrapping it at the end of year 3. A buyer would pay ₦700,000, with selling costs of ₦20,000. The discount rate is 10% and the machine has three years of life left with no residual value.
(a) Calculate fair value less costs of disposal. (2 marks) (b) Calculate value in use. (6 marks) (c) State the recoverable amount and the impairment loss. (3 marks) (d) State the journal entry and the depreciation for next year. (4 marks)
A further written question
Question 13 (20 marks). Delta Works reports at 31 December 20X7. (i) Its factory had a carrying amount of ₦8,000,000 at 1 January 20X7 with 10 years of life remaining. It has a revaluation surplus of ₦1,500,000 relating to it. At 31 December 20X7 its recoverable amount is ₦4,000,000. (ii) Its head office cost ₦15 million on 1 January 20X1 and is depreciated over 30 years on the cost model. At 31 December 20X3 its recoverable amount was ₦10.8 million. At 31 December 20X6 it was ₦14 million.
(a) For the factory, calculate the depreciation, the impairment loss, and show how the loss is recognised. (6 marks)
(b) For the head office, calculate the carrying amount and impairment loss at 31 December 20X3. (3 marks)
(c) Calculate the carrying amount of the head office at 31 December 20X6 before any reversal and the maximum reversal. (5 marks)
(d) State which assets are tested every year, and explain why the head office does not qualify. (3 marks)
(e) Explain why a reversal is capped. (3 marks)
Model answers
Show the model answer to Question 11
(a) Recoverable amount is the higher of fair value less costs of disposal and value in use. (1) Fair value less costs of disposal is the price that would be received to sell the asset in an orderly transaction less direct selling costs. (1) Value in use is the present value of the future cash flows from using the asset and from its final disposal. (1)
(b) (1 mark each, any four) An unexpected fall in market value; adverse changes in technology, markets, the economy or the law; a rise in interest rates; net assets above market capitalisation; damage or obsolescence; plans to discontinue or restructure; a shorter expected life; performance worse than expected.
(c) Goodwill from a business combination (1); an intangible asset with an indefinite useful life (1); an intangible asset not yet available for use (1).
Show the model answer to Question 12
(a) ₦700,000 − ₦20,000 = ₦680,000 (2).
(b)
- Year 1: ₦350,000 ÷ 1.1 = ₦318,182 (1.5).
- Year 2: ₦300,000 ÷ 1.21 = ₦247,934 (1.5).
- Year 3: (₦250,000 + ₦60,000) ÷ 1.331 = ₦232,908 (2).
- Total ₦799,024 (1).
(c)
- Recoverable amount is the higher of ₦680,000 and ₦799,024, which is ₦799,024 (1.5).
- Loss.
₦900,000 − ₦799,024 = ₦100,976 (1.5).
(d)
- Dr Profit or loss ₦100,976, Cr Machine (or accumulated impairment) ₦100,976 (2).
- Depreciation next year.
₦799,024 ÷ 3 = ₦266,341 (2).
Show the model answer to Question 13
(a)
- Depreciation ₦8,000,000 ÷ 10 = ₦800,000, giving ₦7,200,000 (2).
- Loss ₦7,200,000 − ₦4,000,000 = ₦3,200,000 (1).
- Other comprehensive income ₦1,500,000, the surplus on the factory (2); profit or loss ₦1,700,000 (1).
- The total charge to profit or loss is ₦800,000 + ₦1,700,000 = ₦2,500,000.
(b)
- Carrying amount ₦15m × 27/30 = ₦13.5m (1).
- Loss ₦13.5m − ₦10.8m = ₦2.7m in profit or loss (2).
(c)
- After the loss, depreciation is ₦10.8m ÷ 27 = ₦0.4m a year (1).
- At 31 December 20X6, three years later: ₦10.8m − 3 × ₦0.4m = ₦9.6m (1).
- Without the loss the carrying amount would be ₦15m × 24/30 = ₦12.0m (1.5).
- The recoverable amount of ₦14m is above that, so the reversal is limited to ₦12.0m − ₦9.6m = ₦2.4m (1.5).
(d) Goodwill, intangibles with indefinite lives and intangibles not yet available for use are tested every year (2). The head office is a building depreciated over a finite life, so it is tested only when there is an indication (1).
(e) Without a cap, the asset could be carried above what its cost, less normal depreciation, would have given (1). That would be an unrecognised upward revaluation recognised through profit or loss (1). The cap limits the reversal to the loss that has been recovered (1).
Pathfinder on IAS 36 (i): impairment indicators, recoverable amount and impairment loss
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.
Part (c) asks for statement of financial position extracts and notes in which a software licence is amortised and then written down because its recoverable amount at the year end is below its carrying amount. The amortisation and extracts parts belong to earlier topics.
Revise first: Accounting for an impairment loss
Part (a) asks for the difference between impairment and depreciation (5 marks). Part (b) asks for the indicators of impairment and how to identify and account for it (6 marks). Part (c) gives a revalued asset with a surplus and a recoverable amount below its carrying amount (9 marks).
Revise first: Looking for indicators
Source: ICAN Pathfinder, Financial Reporting. Diets covered: Every diet in the Pathfinder, from November Diet, 2021 to May Diet, 2026, was reviewed here. The diets listed above test this topic or include it within a longer question..
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