IFRS
IAS 36 impairment: what to do when an asset is worth less than the books say
IAS 36 impairment is the accounting rule that answers an uncomfortable question: what happens when something your business owns is no longer worth what the books say it is? A delivery van, a machine that no longer fits your production, or a shop fitting in a location that has lost its footfall — the purchase price is history, but the books still carry the asset at cost minus depreciation. If that carrying amount is now higher than what the asset can actually deliver, IAS 36 says the books must catch up with reality. An overstated asset flatters past profits and misleads every decision made from the numbers today — borrowing, pricing, even whether to keep a struggling line of business going.
IAS 36 impairment in plain language
The core idea of IAS 36 impairment is simple. At each reporting date, you ask whether there is any sign that an asset may have lost value. If there is, you compare two numbers:
- The carrying amount — what the asset is currently recorded at in your books.
- The recoverable amount — the most you could get back from the asset, either by selling it or by continuing to use it.
If the recoverable amount is lower than the carrying amount, the difference is an impairment loss, recognised in profit or loss, and the asset is written down to its recoverable amount. The judgement lies in estimating the recoverable amount honestly.
Note what IAS 36 does not cover. Inventories have their own rule (IAS 2, lower of cost and net realisable value), financial assets fall under IFRS 9, and deferred tax assets have their own test.
IAS 36 impairment: the warning signs to watch for
You do not test every asset every year. IAS 36 asks you to look for indicators, and test only when one is present — with one exception, covered below. The indicators split into two groups.
External signs include a significant fall in the asset's market value, adverse changes in technology, markets, the economy or the law, and a rise in market interest rates that pushes up the discount rate used to value the asset, lowering its present value.
Internal signs include physical damage or obsolescence, an asset sitting idle or a plan to dispose of it earlier than expected, and performance that is worse than expected.
For a small business owner, the practical trigger is often obvious once you look: the asset is no longer earning what you assumed when you bought it. A second branch that never took off, equipment tied to a product customers have moved away from, or a vehicle fleet that costs more to run than it brings in. Those are the moments to run the IAS 36 impairment test rather than let depreciation quietly carry an outdated number forward.
How the recoverable amount is worked out
The recoverable amount is the higher of two figures, and taking the higher is deliberate — it reflects that you would choose the better option.
Fair value less costs of disposal is what you could sell the asset for, minus the costs of selling it — agent fees, legal costs, removal costs. If there is an active market price, that is your starting point.
Value in use is what the asset is worth if you keep using it: its expected future cash flows, discounted to today's money at a pre-tax rate reflecting the time value of money and the asset's specific risks. IAS 36 requires those forecasts to be reasonable and supportable, based on recent budgets, with detailed projections capped at five years unless a longer period is justified.
Whichever is higher becomes the recoverable amount. If even the better option is below the carrying amount, the write-down follows.
When assets work as a group
Some assets do not generate cash on their own. A single machine in a production line, or a branch's fixtures, may only earn money as part of a larger operation. IAS 36 then tests the cash-generating unit: the smallest group of assets generating cash largely independently of others, with any impairment allocated first to goodwill, then pro rata across the unit's other assets.
Goodwill is the exception to the indicators rule: it must be tested for impairment every year, whether or not any warning sign has appeared. And goodwill impairment can never be reversed, because a later increase in goodwill's value is treated as internally generated goodwill, which accounting standards do not allow you to recognise.
Can an impairment be reversed?
For assets other than goodwill, yes — if the reasons for the impairment no longer exist. A market recovers, a damaged asset is repaired, a product line turns around. The reversal is recognised in profit or loss, but capped: the asset cannot be written back up beyond the carrying amount it would have had if the impairment had never happened, after normal depreciation. You cannot use a reversal to create a gain above the asset's depreciated cost.
What this means for your business
Impairment testing is not something to fear, and it is not an admission of failure. Assets lose value for ordinary reasons — technology moves on, neighbourhoods change, customer tastes shift. The businesses that get into trouble are the ones whose books still describe the world as it was when the asset was bought.
Three habits make IAS 36 impairment manageable. First, review your major assets when something changes, not only at year-end — a lost contract or a damaged machine is a trigger, not a footnote. Second, keep your forecasts modest and documented, so the value-in-use calculation can be explained to your accountant. Third, remember the write-down itself is not a cash loss; the cash was spent when the asset was bought. The impairment simply stops the balance sheet from pretending otherwise.
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