IAS 36 Impairment of Assets: Recoverable Amount and CGUs

Understand IAS 36 Impairment of Assets

Key rules to remember

Recoverable amount

Recoverable amount = higher of (FVLCOD, VIU)

If either figure is above carrying amount, the asset is not impaired.

Fair value less costs of disposal

FVLCOD = fair value − direct costs of disposal

Costs of disposal are incremental selling costs such as legal fees. Finance costs and tax are not included.

Impairment loss

Impairment loss = carrying amount − recoverable amount (only if positive)

Never negative. A higher recoverable amount does not create a gain here.

CGU allocation order

1) Goodwill 2) Other assets pro rata to carrying amount

Do not reduce any asset below the highest of its FVLCOD, VIU or zero. Reallocate any excess to the other assets pro rata.

Revalued asset loss

Loss → OCI up to the revaluation surplus on that asset; excess → profit or loss

Applies asset by asset, not across the whole class.

Reversal limit

Reversed carrying amount ≤ carrying amount had no impairment been recognised (after depreciation)

Goodwill impairment is never reversed.

How to solve IAS 36 Impairment of Assets questions

1. 1Check for an indicator of impairment, or whether the asset is one that needs an annual test, such as goodwill.
2. 2Decide the level of testing: the single asset, or the CGU it belongs to if it does not generate independent cash flows.
3. 3Find the carrying amount at the test date, after depreciation up to that date (and including goodwill for a CGU).
4. 4Find recoverable amount: FVLCOD (fair value less selling costs) and VIU. Take the higher. Stop early if one already exceeds carrying amount.
5. 5Compute the loss: carrying amount minus recoverable amount. If it is zero or negative, there is no impairment.
6. 6Allocate the loss. For a CGU, goodwill first, then pro rata to the other assets, respecting the floor for each asset.
7. 7Post the loss: profit or loss for cost-model assets. For a revalued asset, OCI up to its revaluation surplus, then profit or loss.
8. 8Recalculate depreciation on the new carrying amount over the remaining life for later periods.

Quickest way: Three-line impairment check

Common mistakes in IAS 36 Impairment of Assets

• Using the lower of FVLCOD and VIU as recoverable amount.

  Students link impairment with prudence and assume the cautious figure applies.

  Fix: Recoverable amount is always the higher of the two. Repeat it as a rule: an owner would choose the better option.

• Forgetting to deduct costs of disposal from fair value.

  The question gives fair value in one line and the costs in another, and students use the headline figure.

  Fix: Always write FVLCOD = fair value − costs. Do not deduct costs from VIU.

• Charging every impairment loss to profit or loss.

  Students learn the cost-model rule and apply it to all assets.

  Fix: For a revalued asset, charge the loss to OCI against that asset's revaluation surplus first. Only the excess goes to profit or loss.

• Allocating a CGU loss pro rata to all assets including goodwill.

  Students remember 'pro rata' but forget the order.

  Fix: Eliminate goodwill first. Only share the remaining loss pro rata across the other assets.

• Reducing an asset below its own fair value less costs of disposal in a CGU allocation.

  Students apply pro rata mechanically without checking the floor.

  Fix: Check each allocated asset against the higher of its FVLCOD, VIU and zero. Reallocate any excess to the other assets pro rata.

• Continuing to depreciate on the old carrying amount after an impairment.

  The impairment is treated as a one-off entry with no future effect.

  Fix: Next year's depreciation is the new carrying amount, less residual value, over the remaining useful life.

Worked examples