The important International Accounting Standard (IAS) known as “Impairment of Assets,” or IAS 36, addresses how firms should evaluate and account for decreases in the value of their assets. When an asset’s recoverable amount, which might be its value or future cash flows decreases, impairment occurs. This guideline is essential for ensuring that businesses disclose their financial accounts truthfully. When determining whether an asset’s carrying amount exceeds its recoverable amount and, if so, how to recognize and account for any impairment losses, IAS 36 gives instructions. To hold transparency and prevent organisations from inflating the well worth in their property, this criterion is essential for advancing accurate monetary reporting on a global scale. This topic is taught by Mustafa Mirchawala at Mirchawala Hub Of Accountancy 

The Fundamentals of IAS 36 

IAS 36 sets out the principles for recognizing and measuring impairment losses on tangible and intangible assets. Its primary objective is to ensure that entities do not carry assets at values that exceed their recoverable amounts, thereby preventing overstatement of assets and understatement of expenses.  


   Key Definitions  

  • Recoverable Amount: Recoverable amount is a crucial accounting term used to determine the recoverable value of an asset. It represents the higher of two values:
  • Fair Value Less Costs to Sell: This is the estimated amount the asset would fetch if it were to be sold on the open market, minus any selling costs (e.g., commissions, legal fees) associated with the sale.
  • Value in Use: This is the present value of future cash flows that an asset is expected to generate during its remaining useful life. Essentially, it assesses the asset’s worth to the entity that owns it.
  • Purpose: The recoverable amount is assessed to determine if an asset has suffered an impairment loss. Impairment occurs when the carrying amount of an asset exceeds its recoverable amount.
  • Carrying Amount: The carrying amount of an asset is the value at which it is recognized on a company’s balance sheet. It is calculated as follows: Start with the original cost of the asset (e.g., purchase price) then Deduct any accumulated depreciation or amortization associated with the asset. lastly , Subtract any accumulated impairment losses (if applicable).
  • Purpose: The carrying amount represents the net book value of the asset, reflecting its historical cost less any depreciation, amortization, or impairment charges. It is essential for financial reporting and determining the asset’s value on the e balance sheet.
  • Impairment: Impairment is the recognition of a decrease in the recoverable amount of an asset below its carrying amount. In simpler terms, the asset’s value has decreased and its carrying amount is no longer supported by the advantages it is expected to provide in the future.
  • Assessment Process: Impairment is typically assessed when there are indicators of potential impairment, such as changes in market conditions, technological obsolescence, or adverse economic events. The impairment test involves comparing the asset’s carrying amount with its recoverable amount. If the carrying amount is higher, an impairment loss is recognized.
  • Recognition: When an impairment loss is recognized, the asset’s carrying amount is adjusted down to its recoverable amount.The asset’s value is decreased on the balance sheet as a result of this adjustment, which is recognized as an expense on the income statement.

Principles of IAS 36  

Recognition of Impairment Loss  

  • Testing for Impairment: IAS 36 mandates that an entity should assess at each reporting date whether there is any indication that an asset may be impaired. If such indications exist, the recoverable amount of the asset must be determined.  
  • Impairment Loss: When an asset’s carrying value exceeds its recoverable value, an impairment loss is recognised. A charge to the income statement is made for this loss, which is allocated to lower the asset’s carrying amount. 

Measuring Impairment Loss

  • Recoverable Amount: The recoverable amount is determined using either the asset’s fair value less costs to sell or its value in use, whichever is higher.  
  • Fair Value Less Costs to Sell: This approach considers the amount obtainable from selling the asset in an arm’s length transaction, less the costs of disposal.  
  • Value in Use: Value in use is the present value of the future cash flows expected to be derived from the asset’s continued use and eventual disposal.  

Cash-Generating Units (CGUs)

  • Unit of Measurement: IAS 36 requires entities to group assets into CGUs for the purpose of impairment testing. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.  

Impairment of Goodwill

  • Specific Rules for Goodwill: IAS 36 provides specific guidance for testing the impairment of goodwill. It requires an annual impairment test and provides a methodology for allocating goodwill to CGUs.  

Practical Application of IAS 36     

  • External Indicators: These encompass observable modifications in marketplace conditions, overall economic performance, or technological advancements. 
  • Internal Indicators: These might also arise from evidence of obsolescence, bodily damage, or big changes in the way wherein an asset is used. 

Recoverable Amount Determination 

Fair Value Calculation: The truthful price much less expenses to sell is frequently decided the usage of market costs or valuation strategies, which include the discounted cash flow approach 

  • Value in Use Calculations: Value in use calculations entail calculating future cash flows, choosing a precise discount rate, and considering variables like future inflation and market conditions. 

Impairment Testing for CGUs  

  • Identifying CGUs: Entities need to identify the CGUs to which an asset belongs, which can sometimes be a complex task requiring judgement.  
  • Impairment Calculation: To determine if a CGU is impaired, its recoverable amount must be compared to it carrying amount, and any resulting impairment losses must be allocated to assets within the CGU. 

Significance :

Transparency and Accountability  

  • True and Fair View: IAS 36 ensures that financial statements provide a true and fair view of an entity’s financial position. It avoids overstating assets by acknowledging impairment losses when they happen.
  • Timely Recognition: Timely popularity of impairment guarantees that stakeholders have accurate and updated information approximately the charge of an entity’s assets. 

Making and Risk Management     

  • Informed Decision-Making: Accurate monetary reporting facilitated by means of IAS 36 enables stakeholders, consisting of traders, lenders, and control, make informed selections about the entity’s performance and destiny possibilities
  • Risk Assessment: Entities are highly geared up to evaluate and manage dangers related to their assets when they have a clear record of impairment. 

Consistency and Comparability  

  • Consistency: IAS 36 promotes consistency in the treatment of impairment across different entities, making it easier for stakeholders to compare the financial performance of various organisations.  

Regulatory Compliance  

  • Legal Obligations: In many regions, following IAS 36 is not just a choice but a legal requirement. This implies that it must be followed by firms while generating their financial statements.

Practical Challenges in Implementing   

Judgment and Estimation

  • Subjectivity: The determination of recoverable amounts, especially value in use, often involves a significant degree of subjectivity and estimation. Entities must exercise judgment in these calculations.  
  • Changing Circumstances: Economic conditions and market dynamics can change rapidly, affecting the recoverable amount of assets. Entities must stay vigilant in assessing indicators of impairment.    

Complex Asset Structures

  • Complex Businesses: Some entities have complex asset structures that span multiple CGUs. Identifying and allocating impairment correctly in such cases can be challenging.  

Goodwill Assessment

  • Goodwill Valuation: The impairment testing of goodwill can be intricate, as it requires the estimation of cash flows for the CGU to which goodwill belongs. The allocation of goodwill to CGUs is also a critical step. 

Disclosure Requirements

  • Disclosure Complexity: IAS 36 mandates extensive disclosures regarding impairment testing, including assumptions used and sensitivity analysis. Meeting these requirements can be demanding.  

Future Developments and Evolving Interpretations  

Impact of COVID-19

  •  Considering the Pandemic’s Influence on Asset Values: Organisations have found themselves in the position of needing to assess how the COVID-19 pandemic has influenced the recoverable values of their assets. 
  • Navigating Uncertainties: In addition, they have had to deal with the difficulty of estimating how long the pandemic’s effects will last. Particularly in view of the continuous uncertainty surrounding the situation, this has proven to be a challenging assignment. 

Evolving Industry Practices

  • Sustainability Reporting: As sustainability reporting becomes more popular, organisations are starting to take a broader view of asset impairment, considering environmental and social considerations.    

Companies with substantial intangible assets may find themselves under the impairment disclosure spotlight – and facing significant charges – as the financial crisis continues, warns Graham Holt-ACCA Global


IAS 36, the norm for asset impairment, is a core tenet of global accounting standards, to sum up. By proscribing the overstatement of belongings, it’s essential for making sure that monetary statements mirror the financial situation of organisations. For accounting specialists, stakeholders, and regulators alike, it’s essential to recognize the essential principles and actual-global applications of IAS 36. It improves openness, assists in making decisions, and guarantees adherence to legal and regulatory standards. 

Frequently Asked Question (FAQs) related to IAS 36: Impairment of Assets: 

Q1.What is the purpose of IAS 36 in financial reporting? 

IAS 36, or the International Accounting Standard 36, plays a vital role in financial reporting by providing guidelines for the assessment and accounting of asset impairments. Its primary purpose is to ensure that assets are not carried at values exceeding their recoverable amounts, preventing overstatement of an entity’s assets in financial statements.  

Q2.What are the legal and regulatory implications of IAS 36 compliance?  

IAS 36 compliance is often a legal and regulatory requirement in many jurisdictions. Failure to adhere to this standard in financial reporting can lead to legal repercussions and regulatory penalties. Therefore, organisations are obligated to follow IAS 36 guidelines while preparing their financial statements to meet these legal and regulatory requirements. 

Q3.How does IAS 36 distinguish between the recoverable amount and the carrying amount of an asset, and why is this differentiation important? 

IAS 36 distinguishes between the “recoverable amount” and the “carrying amount” of an asset. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. The carrying amount, on the other hand, is the amount at which an asset is recognized in the financial statements.

This differentiation is crucial because it forms the basis for assessing whether an asset is impaired. If the carrying amount of an asset exceeds its recoverable amount, it indicates that the asset is impaired, and an impairment loss needs to be recognized. Understanding this distinction is essential for accurate financial reporting and ensuring that assets are not overstated in the financial statements. 

Mahnoor Maqbool
I’m currently an ACCA (Association of Chartered Certified Accountants) student, aspiring to become a qualified accountant from Mirchawala’s Hub Of Accountancy . However, I’ve taken a gap due to financial issues, which I hope to overcome in the future to continue pursuing my studies and career goals.

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