The objective of IAS 36 is to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use). When the carrying amount of an asset is reduced to its recoverable amount then reduction in the asset’s value is an impairment loss.

 Recognition and Measurement of an Impairment Loss

  • Impairment loss is recognized when the carrying amount of an asset exceeds its recoverable amount.
  • The impairment loss is recorded as an expense in the income statement (unless it is related to a revalued asset).
  • Once an impairment loss is recognized, the asset should be valued in the statement of financial position at its recoverable value
  • Adjustments are also needed for depreciating the asset for future periods.
  • If the asset’s carrying value is less than either of asset’s fair value less costs to sell and its value in use then the asset will not be impaired.

 Carrying amount

 Carrying value is the amount at which an asset is shown in the statement of financial position reduced by accumulated depreciation and accumulated impairment losses. This can reasonably be taken to equate to the net book value of the asset in the statement of financial position.

Cash Generating Unit

This is a separately identifiable group of assets

  • hat continuously produces cash inflows and
  • these cash flows are mainly independent of the cash inflows from use of other assets or groups of assets

Recoverable Amount

The recoverable amount of an asset or a cash-generating unit is the higher of its fair or resale value less future costs to sell and its present value to the company when used by the company.

Fair Value

Fair value is the value at which an asset could be exchanged between knowledgeable and willing parties in an arm’s length transaction. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The statement provides guidance in respect of this:

  • the best evidence of fair value is a binding sale agreement less disposal costs.
  • if there is an active market as evidenced by buyers, sellers and readily available prices, then it is permissible to use the market price less disposal costs.
  • where there is no active market then the entity can use an estimate based on the best information available of the selling price less the disposal costs.
  • costs of disposal are direct costs only, for example legal or removal expenses.

Value in use

Value in use is the present or discounted value of estimated future cash flows expected to be derived from an asset or a cash-generating unit. This is usually calculated using discounted cash flow techniques. In considering this the entity should consider the following:

  • estimated future cash flows from the asset.
  • expectations of possible variations - either in amount or timing of the future cash flows.
  • current interest rates.
  • the effect of uncertainty inherent in the asset.

Indications of Impairment

At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired (i.e. its carrying amount may be higher than its recoverable amount). IAS 36 has a list of external and internal indicators of impairment. If there is an indication that an asset may be impaired, then the asset's recoverable amount must be calculated.

External Indicators

  • decline in market value
  • negative changes in technology, markets, economy, or laws
  • increases in market interest rates
  • prices of company’s shares are below book value

Internal Indicators

  • obsolescence or physical damage
  • asset is part of a restructuring or held for disposal
  • worse economic performance than expected

Reversal of an Impairment Loss

An entity shall reverse impairment loss if there is any indication that an impairment loss for an asset other than goodwill recognized in prior periods

  • may no longer exist or
  • may have decreased

The Impairment Review                 

The impairment review involves comparing the asset’s carrying amount with the recoverable amount. It is conducted in three steps:

Step 1

Ascertain the asset’s carrying amount – its net book value.

Step 2

Compare carrying amount with the asset’s recoverable amount. The recoverable amount will be the higher of the asset’s fair value less costs to sell and the asset’s value in use.

Step 3

If the carrying value is greater than the recoverable amount then the asset is impaired. It must be written down to its recoverable amount in the statement of financial position. The amount of the impairment is recognised as an expense in the statement of financial position.

Worked Example

At the start of the year, a company had some machines valued at $25 000. Depreciation on plant is charged at 20 % using the reducing balance method. Following an impairment review, the fair value of machines is $21 200 and its value in use is $22 800. At which value should machinery be shown in the year end statement of financial position?

Step 1

Net Book Value (Carrying amount) = 25 000 – (20/100*25 000) = $ 20 000

Step 2

Fair value = $ 21 200

Value in use = $ 22 800

Recoverable amount = Higher between Fair value and value in use = $ 22 800

Step 3

Machinery in SOFP = Lower between Carrying amount and recoverable amount = $ 20 000

If carrying amount is greater than the recoverable amount, the difference is recorded as an Impairment loss in the income statement.

Question 1

A company has three different non-current assets. The directors have the following valuations of these assets to carry out the impairment review.


carrying amount

fair value less costs to sell

value in use





18 000

21 200

20 900


22 000

19 200

21 400


16 000

17 800


  1. Calculate recoverable amount of each class of asset.
  2. Calculate the value at which total non-current assets should be shown in the statement of financial position?
  3. Calculate impairment loss (if any) for the year.