Financial Reporting · Impairment of assets

IAS 36 Impairment of Assets: Scope and Indicators

Updated 11 October 2026 · Fact-checked

IAS 36 makes sure assets are not carried above what the entity can recover from them. At each reporting date you assess whether any indicator of impairment exists. If one does, you estimate recoverable amount and compare it with carrying amount. Some assets, such as goodwill, must be tested every year regardless.

Understand Impairment of Assets Under IAS 36: Scope and Indicators

An asset is a source of future economic benefits. If the benefits it can bring are worth less than the amount in the statement of financial position, the asset is overstated. IAS 36 Impairment of Assets stops this. It requires an entity to write the asset down to what it can recover.

Carrying amount is the amount at which an asset is recognised after deducting accumulated depreciation (or amortisation) and accumulated impairment losses. For a revalued asset, start from the revalued amount. This is the figure you compare against recoverable amount.

You do not test every asset in full every year. At the end of each reporting period, you assess whether there is any indication that an asset may be impaired. If there is none, you do nothing more. If there is, you estimate the asset's recoverable amount and test it. The exceptions are goodwill, intangible assets with an indefinite useful life and intangible assets not yet available for use. These must be tested annually whether or not there is an indicator.

IAS 36 lists indicators. External indicators come from outside the entity: a significant fall in the asset's market value beyond normal use or time; adverse changes in technological, market, economic or legal environment; increases in market interest rates that raise the discount rate and cut value in use; and the entity's net assets being higher than its market capitalisation. Internal indicators come from inside: physical damage or obsolescence; the asset becoming idle, or plans to discontinue, restructure or dispose of it early; and internal reports showing the asset performs worse than expected.

The list is not exhaustive. IAS 36 covers most non-financial assets, including property, plant and equipment, intangible assets, goodwill, right-of-use assets and investments in subsidiaries and associates. It excludes items covered by other standards, such as inventories (IAS 2), deferred tax assets (IAS 12), financial assets within IFRS 9, investment property at fair value (IAS 40) and assets held for sale (IFRS 5).

Key rules to remember

Carrying amount: Carrying amount = cost (or revalued amount) − accumulated depreciation − accumulated impairment losses; This is the figure compared with recoverable amount.
Impairment test: Impaired if carrying amount > recoverable amount; Loss = carrying amount − recoverable amount.
Recoverable amount: Recoverable amount = higher of (fair value less costs of disposal) and value in use; If either figure is above carrying amount, the asset is not impaired and you need not calculate the other.
When to test: Each reporting date: look for indicators. Annually regardless: goodwill, indefinite-life intangibles, intangibles not yet available for use; Other assets are tested only if an indicator exists.

How to solve Impairment of Assets Under IAS 36: Scope and Indicators questions

Use this method for any scope or indicator question.

1Check the asset is within IAS 36. Rule out inventories, deferred tax, financial assets under IFRS 9, investment property at fair value and held-for-sale assets.
2Decide whether the asset is one that must be tested annually: goodwill, indefinite-life intangibles, intangibles not yet in use.
3If not, scan the scenario for indicators and label each as external or internal.
4Conclude whether an indicator exists. If it does, a full impairment test is needed.
5Calculate carrying amount: cost or valuation less accumulated depreciation and previous impairment. Depreciate up to the test date first.
6Compare carrying amount with recoverable amount, if given, and state whether there is an impairment loss.
7Write a clear conclusion that names the indicator and the standard's requirement.

Quickest way: Indicator-first shortcut

When to use it: Section A and OT case questions that ask whether a test is required or which item is an indicator.

Ask first: is it goodwill or an indefinite-life or not-yet-available intangible? If yes, the answer is a test every year.
Otherwise ask: has anything bad happened, outside (market, law, rates, technology) or inside (damage, idle, plans to dispose, poor performance)?
If yes, a test is needed. If the news is neutral or good, no test is required.
For a numbers question, compute carrying amount after depreciation and compare it with the given recoverable amount.

Common mistakes in Impairment of Assets Under IAS 36: Scope and Indicators

Testing every asset every year.
Students confuse the annual review for indicators with a full impairment test.
Fix: Only goodwill and certain intangibles need an annual test. Other assets need a test only when an indicator exists.
Using cost instead of carrying amount.
The question gives cost first and students rush to compare.
Fix: Deduct accumulated depreciation up to the test date, and any earlier impairment, before comparing.
Treating a rise in interest rates as irrelevant.
Interest rates feel like a financing matter, not an asset matter.
Fix: Higher market rates raise the discount rate used in value in use, which lowers it. This is an external indicator.
Assuming the list of indicators is complete.
Students memorise the list and reject anything not on it.
Fix: The list is a minimum. Any evidence that the asset may be worth less than its carrying amount can trigger a test.
Applying IAS 36 to inventory or investment property at fair value.
Students see an asset and assume IAS 36 applies.
Fix: Check scope first. Inventory is written down to net realisable value under IAS 2, and fair value assets are already remeasured.
Booking a loss when the asset is only held below cost in the market.
A falling price is seen as proof of loss.
Fix: An indicator only triggers a test. A loss arises only if carrying amount exceeds recoverable amount.

Worked examples

Example 1

At 31 December, Orion Ltd has: (1) goodwill from an acquisition three years ago; (2) a machine whose market value fell sharply this year because a new technology was launched; (3) inventory with a net realisable value below cost; (4) a building in good condition in a rising property market. State which items must be tested for impairment under IAS 36 and why.

Show the solution

Goodwill: must be tested annually regardless of any indicator, so it is tested.
Machine: new technology is an adverse external change and the market value has fallen. This is an indicator, so a test is required.
Inventory: outside IAS 36. It is measured at the lower of cost and net realisable value under IAS 2.
Building: no indicator is present, rising market values are favourable, and it is not an asset tested annually. No test is needed.

Answer: Test goodwill (annual requirement) and the machine (external indicator). Do not test the inventory (IAS 2) or the building (no indicator).

Example 2

On 1 January Year 1 Delta bought a machine for ₹10,00,000 with a 10-year life and no residual value, using straight-line depreciation. At 31 December Year 3 a competitor's new product has cut demand and the machine's recoverable amount is estimated at ₹6,50,000. Is the machine impaired, and by how much?

Show the solution

Annual depreciation = ₹10,00,000 ÷ 10 = ₹1,00,000.
Accumulated depreciation after three years = ₹3,00,000.
Carrying amount = ₹10,00,000 − ₹3,00,000 = ₹7,00,000.
Indicator: falling demand from competitor activity is an adverse market change, so a test is required.
Compare: carrying amount ₹7,00,000 exceeds recoverable amount ₹6,50,000.
Impairment loss = ₹7,00,000 − ₹6,50,000 = ₹50,000.

Answer: The machine is impaired. Recognise a loss of ₹50,000 in profit or loss, reducing carrying amount to ₹6,50,000.

Exam tips

In Section A, check scope first. Many wrong options are assets that sit under another standard.
Remember the three annual-test assets. Examiners often hide goodwill in a scenario and ask whether a test is needed.
Always depreciate to the test date before finding carrying amount. Using cost is the most common lost mark.
In written answers, name the indicator, say whether it is internal or external, and then state the consequence.
Do not compute both fair value less costs of disposal and value in use if one already exceeds carrying amount.

Practice questions from Impairment of assets

Impairment of Assets Under IAS 36: Scope and Indicators 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 Under IAS 36: Scope and Indicators: frequently asked questions

When must an asset be tested for impairment under IAS 36?

At each reporting date you assess whether any indicator exists. If one does, you test that asset. Goodwill, indefinite-life intangibles and intangibles not yet available for use are tested every year regardless.

What is carrying amount in IAS 36?

It is the amount at which the asset is recognised after deducting accumulated depreciation or amortisation and accumulated impairment losses. If the asset is revalued, start from the revalued amount.

What are examples of external indicators of impairment?

A significant fall in market value, adverse changes in technology, markets, economy or law, higher market interest rates that raise the discount rate, and net assets exceeding market capitalisation.

What are examples of internal indicators of impairment?

Physical damage or obsolescence, an asset becoming idle, plans to discontinue or restructure operations or dispose of the asset early, and internal reports showing worse performance than expected.