Financial Reporting · Impairment of assets

Recognising and Measuring an Impairment Loss under IAS 36

Updated 11 October 2026 · Fact-checked

An impairment loss is the amount by which an asset's carrying amount exceeds its recoverable amount. Recoverable amount is the higher of fair value less costs of disposal and value in use. Charge the loss to profit or loss, unless the asset is revalued. Then charge it first to the revaluation surplus in OCI.

Understand Recognising and Measuring an Impairment Loss

An asset must never be carried at more than the entity can recover from it. If the carrying amount is higher than that, the asset is impaired. The statement of financial position would otherwise overstate what the entity owns.

Recoverable amount is the higher of two figures: fair value less costs of disposal (what you could get by selling it, net of selling costs) and value in use (the present value of the future cash flows the asset will generate). The logic is that a rational owner would either sell or keep using the asset, whichever is better.

The impairment loss is carrying amount minus recoverable amount, but only if carrying amount is higher. If recoverable amount is higher, there is no loss. You never write an asset up under IAS 36.

Where the loss goes depends on the measurement model. For an asset held at cost, the whole loss is an expense in profit or loss. For an asset held at a revalued amount, the loss is treated as a revaluation decrease. It is debited to other comprehensive income (the revaluation surplus) up to the surplus held for that same asset. Any excess goes to profit or loss.

After the loss, depreciation is recalculated. The new carrying amount is depreciated over the remaining useful life, less any residual value. Also remember that you must depreciate up to the date of the impairment test before you compare carrying amount with recoverable amount.

Key rules to remember

Impairment loss: Impairment loss = Carrying amount − Recoverable amount (if positive); If recoverable amount is higher than carrying amount, there is no impairment and no gain is recognised under IAS 36.
Recoverable amount: Recoverable amount = Higher of (Fair value less costs of disposal) and (Value in use); If one figure is above carrying amount, the asset is not impaired and you need not work out the other.
Fair value less costs of disposal: FVLCD = Fair value − Costs of disposal; Costs of disposal are incremental selling costs such as legal fees, not finance costs or tax.
Cost model treatment: Dr Impairment loss (profit or loss) Cr Asset (or accumulated impairment); The whole loss goes to profit or loss.
Revaluation model treatment: Dr Revaluation surplus (OCI) up to the surplus on that asset; Dr Profit or loss for any excess; Cr Asset; Only the surplus relating to the same asset can be used.
Depreciation after impairment: New annual depreciation = (Revised carrying amount − Residual value) ÷ Remaining useful life; Apply from the date of impairment.

How to solve Recognising and Measuring an Impairment Loss questions

Use this order for any question on an impairment loss for a single asset.

1Bring the carrying amount up to date. Charge depreciation to the date of the impairment test, and for a revalued asset, include any depreciation on the revalued amount.
2Identify fair value less costs of disposal by deducting disposal costs from fair value.
3Identify value in use, usually given as a discounted cash flow figure.
4Recoverable amount is the higher of the two. If only one figure is given, check whether it exceeds carrying amount first.
5Compare with carrying amount. If carrying amount is higher, the difference is the impairment loss. If not, stop: there is no loss.
6Decide on the model. Cost model: the entire loss goes to profit or loss. Revaluation model: debit the revaluation surplus on that asset first, then profit or loss for any balance.
7Write the journal and update the asset's carrying amount to recoverable amount.
8Recalculate depreciation for future years based on the new carrying amount and remaining life.

Quickest way: Three-line impairment check

When to use it: Use this in Section A and Section B objective questions where you need the loss or the amount charged to profit or loss.

Write: Carrying amount (after depreciation to date) − Recoverable amount (higher of the two figures) = Loss.
Ask: is the asset revalued? If no, the whole loss is in profit or loss.
If yes, take the revaluation surplus balance for that asset. The charge to OCI is the lower of the loss and that surplus. The remainder goes to profit or loss.

Common mistakes in Recognising and Measuring an Impairment Loss

Using the lower of fair value less costs of disposal and value in use.
Students think prudence means picking the smaller figure.
Fix: Recoverable amount is always the higher of the two. A sensible owner would take the better option.
Forgetting to depreciate the asset to the test date before comparing.
The question gives a cost and a recoverable amount and students compare them directly.
Fix: Always compute the up-to-date carrying amount first. Impairment is measured against that figure.
Charging the whole loss on a revalued asset to profit or loss.
Students remember that impairment losses are expenses and stop there.
Fix: For a revalued asset the loss is a revaluation decrease. Use the revaluation surplus on that asset first.
Deducting disposal costs from value in use.
Students mix up the two components of recoverable amount.
Fix: Disposal costs reduce only fair value. Value in use is a discounted cash flow figure and stands as given.
Using the revaluation surplus of other assets to absorb the loss.
Students see one combined revaluation surplus balance in equity.
Fix: Only the surplus relating to the same asset can be used. Any remaining loss goes to profit or loss.
Not changing the depreciation charge after the impairment.
Students stop once the journal is posted.
Fix: Depreciate the new carrying amount over the remaining useful life. This affects next year's profit and the closing balance.

Worked examples

Example 1

Alpha bought a machine on 1 January 20X1 for ₹10,00,000. It is depreciated straight line over 10 years with no residual value, and measured under the cost model. At 31 December 20X3 there are impairment indicators. Fair value less costs of disposal is ₹5,50,000 and value in use is ₹6,20,000. Calculate the impairment loss and the depreciation charge for 20X4.

Show the solution

Annual depreciation = ₹10,00,000 ÷ 10 = ₹1,00,000.
Carrying amount at 31 December 20X3 after three years = ₹10,00,000 − ₹3,00,000 = ₹7,00,000.
Recoverable amount is the higher of ₹5,50,000 and ₹6,20,000, so it is ₹6,20,000.
Impairment loss = ₹7,00,000 − ₹6,20,000 = ₹80,000.
Cost model, so the whole loss goes to profit or loss: Dr Impairment loss ₹80,000, Cr Machine (accumulated impairment) ₹80,000.
Remaining life is 7 years. Depreciation for 20X4 = ₹6,20,000 ÷ 7 = ₹88,571 (rounded).

Answer: Impairment loss ₹80,000, charged to profit or loss. The 20X4 depreciation charge is ₹88,571 (rounded).

Example 2

Beta owns a building revalued on 1 January 20X1 to ₹60,00,000, giving a revaluation surplus of ₹8,00,000 (no earlier revaluation of this building). Remaining useful life at that date is 20 years with no residual value, straight line. At 31 December 20X1 the recoverable amount is ₹50,00,000. Show the accounting for the impairment loss.

Show the solution

Depreciation for 20X1 = ₹60,00,000 ÷ 20 = ₹3,00,000.
Carrying amount at 31 December 20X1 = ₹60,00,000 − ₹3,00,000 = ₹57,00,000.
Recoverable amount is ₹50,00,000, so the impairment loss = ₹57,00,000 − ₹50,00,000 = ₹7,00,000.
The asset is revalued, so the loss is treated as a revaluation decrease. The surplus relating to this building is ₹8,00,000, which is more than the loss.
Journal: Dr Revaluation surplus (OCI) ₹7,00,000, Cr Building ₹7,00,000.
Nothing is charged to profit or loss for the impairment. The remaining surplus is ₹1,00,000.
Depreciation for 20X2 = ₹50,00,000 ÷ 19 = ₹2,63,158 (rounded).

Answer: The loss of ₹7,00,000 is charged entirely to the revaluation surplus through OCI. Profit or loss bears only the normal depreciation of ₹3,00,000 for 20X1. The building is carried at ₹50,00,000.

Exam tips

Check the model first. The words 'revalued' or 'revaluation surplus' in a question mean the loss goes to OCI first, up to the surplus on that asset.
In Section B and C questions, show the carrying amount and the recoverable amount as separate lines. Marks are awarded for each step, even if one number is wrong.
In objective questions, expect distractors that use the lower figure, skip depreciation, or charge everything to profit or loss. Work the loss before you look at the options.
Always state where the debit goes: 'profit or loss' or 'other comprehensive income'. A correct number with the wrong location can lose the mark.
If an asset's recoverable amount is above its carrying amount, say so and state that no impairment arises. Do not record a gain.

Practice questions from Impairment of assets

Recognising and Measuring an Impairment Loss in other exams

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

Recognising and Measuring an Impairment Loss: frequently asked questions

How do you account for an impairment loss on a revalued asset?

Treat it as a revaluation decrease. Debit the revaluation surplus (in OCI) up to the surplus held for that same asset, and debit profit or loss for any remainder. Credit the asset.

What is the journal entry for an impairment loss in ACCA FR?

Under the cost model: Dr Impairment loss (profit or loss), Cr Asset or accumulated impairment. Under the revaluation model, debit the revaluation surplus first and then profit or loss for any excess. The credit is always to the asset.

Is recoverable amount the higher or lower of fair value less costs of disposal and value in use?

It is the higher of the two. If either one is above the carrying amount, the asset is not impaired. This is a very common objective test trap.

Do you change depreciation after an impairment?

Yes. Depreciate the new carrying amount, less any residual value, over the remaining useful life. This reduces future depreciation charges.