ACCA Applied Skills · Financial Reporting

Impairment of Assets (IAS 36) for ACCA Financial Reporting

Impairment means an asset is carried at more than it can recover. Under IAS 36 you compare carrying amount with recoverable amount, which is the higher of fair value less costs of disposal and value in use. If carrying amount is higher, you write the asset down and charge the loss to profit or loss, unless it reverses a revaluation surplus.

What this chapter covers

This chapter covers IAS 36 Impairment of Assets. The core idea is simple: an asset must not be carried above the amount the entity expects to recover from it. You learn when to test, how to measure recoverable amount, how to record the loss, and what changes when assets work together in a cash-generating unit.

The chapter has a clear flow. Start with scope and indicators. Then measure recoverable amount. Then record the loss for a single asset. Then move to cash-generating units, where the loss is allocated in a fixed order. Finish with goodwill, which is tested every year, and the rules on reversing losses.

It links to several other areas of Financial Reporting. Property, plant and equipment and intangible assets supply the carrying amounts, including depreciation and revaluation. Group accounts supply goodwill and the need to test a subsidiary as a cash-generating unit. Non-current assets held for sale use a different measurement rule, so you must know when IAS 36 applies and when it does not.

Impairment appears regularly in the objective test questions and is a common part of the 20-mark constructed response questions, often inside a group or non-current asset question. The calculations are short and follow a fixed order, so well-prepared students pick up marks quickly. Objective questions are marked all or nothing, so a wrong step in the sequence loses the whole mark. Learning the order once lets you handle both the numeric questions and the written explanations.

Impairment of assets: topics in the order to study them

1Impairment of Assets Under IAS 36: Scope and IndicatorsStart here to learn which assets are covered, the principle behind the standard, and when a test is needed.
2Recoverable Amount: Fair Value Less Costs of Disposal and Value in UseYou need recoverable amount before you can decide whether any loss exists.
3Recognising and Measuring an Impairment LossOnce you can find recoverable amount, you compare it with carrying amount and record the loss, including the revalued asset case.
4Cash-Generating Units and Allocating Impairment LossesThis builds on single-asset testing and adds the order of allocation and the limit on writing down individual assets.
5Impairment of Goodwill and Reversal of Impairment LossesGoodwill testing uses cash-generating units, so it comes last, together with the reversal rules that contrast with goodwill.

How to prepare Impairment of assets

Impairment is procedural. Practise the steps until the order is automatic, then add the written points.

Read the indicators and scope first, and write a short list of external and internal signs of impairment in your own words.
Learn recoverable amount as a rule: higher of fair value less costs of disposal and value in use. Practise finding each figure from a scenario, and note when you can skip one.
Work single-asset questions in this order: carrying amount, recoverable amount, loss, then the accounting entry. Include the revalued asset case.
Practise cash-generating unit questions with a table: list the assets, allocate the loss to goodwill first, then pro rata to other assets, and check no asset falls below its own recoverable amount where it can be measured.
Do goodwill and reversal questions together so you remember the contrast: goodwill is tested annually and its loss is never reversed, while other assets can have losses reversed within limits.
Finish with timed mixed questions that combine impairment with depreciation, revaluation or a group. Then write a three-line explanation of each answer, as you would in a constructed response question.

Common mistakes in Impairment of assets

Comparing carrying amount with the wrong recoverable figure, such as the lower of the two measures.
Fix: Say it each time: recoverable amount is the higher of fair value less costs of disposal and value in use.
Forgetting to deduct costs of disposal from fair value.
Fix: Subtract the disposal costs before comparing, and label the result clearly.
Allocating a unit's loss pro rata to all assets, including goodwill.
Fix: Write the order on your answer: goodwill first, then other assets pro rata, then check each asset's floor.
Charging the whole loss on a revalued asset to profit or loss.
Fix: Check for a surplus first. Debit it up to its balance, then charge the remainder to profit or loss.
Reversing a goodwill impairment, or reversing above the original depreciated amount.
Fix: Remember goodwill is never reversed. For other assets, cap the reversal at the carrying amount had no loss been recognised.
Ignoring depreciation when finding the carrying amount at the test date.
Fix: Always bring depreciation up to the date of the test before comparing with recoverable amount.

Last-day revision: Impairment of assets

Impairment: carrying amount is higher than recoverable amount.
Recoverable amount is the higher of fair value less costs of disposal and value in use.
Value in use is the present value of expected future cash flows from continuing use and final disposal.
You do not need both measures if one already exceeds carrying amount.
Review for indicators at each reporting date; test goodwill and intangibles with indefinite lives every year.
An impairment loss is normally charged to profit or loss.
For a revalued asset, the loss first reduces the revaluation surplus for that asset, then goes to profit or loss.
In a cash-generating unit, allocate the loss to goodwill first, then to other assets pro rata to carrying amounts.
Do not reduce an asset below the highest of its fair value less costs of disposal, value in use and zero, where these can be measured.
Impairment losses on goodwill are never reversed.
Other losses can be reversed if estimates change, but not above the carrying amount that would have existed without the impairment.
Depreciate the written-down amount over the remaining life after an impairment.

Impairment of assets practice questions

Impairment of assets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Impairment of assets: frequently asked questions

What is impairment of assets in ACCA Financial Reporting?

It is the situation where an asset's carrying amount is higher than the amount the entity can recover from it. IAS 36 requires the asset to be written down to recoverable amount. The loss is usually recognised in profit or loss.

Do I need to calculate both fair value less costs of disposal and value in use?

Not always. If either one is higher than carrying amount, the asset is not impaired and you can stop. Calculate both only when neither is enough on its own.

How is an impairment loss allocated in a cash-generating unit?

Reduce goodwill allocated to the unit first. Then reduce the other assets pro rata to their carrying amounts. No asset should go below the highest of its fair value less costs of disposal, value in use and zero, where those can be measured.

Can impairment of goodwill be reversed?

No. Once goodwill is impaired, the loss stays, even if conditions improve. Losses on other assets can be reversed when the estimates used to find recoverable amount change, subject to a cap.

How is impairment examined in the objective test questions and constructed response questions?

Objective questions test a single calculation or a rule, such as the recoverable amount or the loss on a unit. Constructed response questions usually include impairment within a larger question, with figures and a short written explanation. Show each step so you can earn marks even if one number is wrong.