Strategic Business Reporting (International) · Non-current assets

IAS 36 Impairment of Assets: Method and Examples

Updated 11 October 2026 · Fact-checked

IAS 36 stops assets being carried above what the entity can recover from them. 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, write the asset down. For a cash-generating unit, goodwill is written off first, then other assets pro rata.

Understand IAS 36 Impairment of Assets

An asset must not be carried at more than the amount you can recover from it, either by using it or by selling it. If the carrying amount is higher than that recoverable amount, the asset is impaired. You recognise the excess as an impairment loss straight away.

You test at each reporting date for indicators of impairment. Examples are falling market values, adverse changes in technology, market or law, rising interest rates, physical damage, plans to restructure or dispose, and worse than expected asset performance. Some assets need a test every year whether or not there is an indicator: goodwill, intangible assets with an indefinite useful life, and intangible assets not yet available for use. The annual test may be done at any time in the year, if done at the same time each year.

Recoverable amount is the higher of fair value less costs of disposal (FVLCD) and value in use (VIU). FVLCD is what a market participant would pay (IFRS 13 basis) less direct selling costs. VIU is the present value of the future cash flows the entity expects from continuing use and final disposal. VIU uses management's reasonable and supportable forecasts, a pre-tax discount rate, and excludes uncertain future restructurings or enhancements and financing and tax cash flows. If either amount is above carrying amount, there is no impairment, so you need not calculate the other.

Many assets do not generate cash flows on their own. Then you test the smallest identifiable group of assets that generates largely independent cash inflows: a cash-generating unit (CGU). Goodwill does not generate cash by itself, so it is allocated to the CGUs (or groups of CGUs) expected to benefit from the acquisition, and tested with them. Corporate assets are allocated to CGUs on a reasonable and consistent basis where possible.

An impairment loss on a CGU is allocated first to goodwill, then to the other assets pro rata to their carrying amounts. No asset may be reduced below the highest of its FVLCD (if measurable), its VIU (if measurable) and zero. Later, if the estimates change, you may reverse a loss on assets other than goodwill. A goodwill impairment is never reversed.

Key rules to remember

Impairment test: Impairment loss = Carrying amount − Recoverable amount (if positive); If recoverable amount is higher than carrying amount, there is no loss.
Recoverable amount: Higher of (FVLCD, VIU); FVLCD = fair value − direct costs of disposal. VIU = present value of expected pre-tax cash flows.
Allocation of CGU loss: 1) Goodwill to zero; 2) other assets pro rata to carrying amounts; Do not reduce any asset below the higher of its FVLCD, VIU and zero. Reallocate any excess to the other assets pro rata.
Reversal limit: Reversed carrying amount ≤ carrying amount had no impairment been recognised (net of depreciation); Applies to individual assets other than goodwill. Never reverse goodwill.
Reversal in a CGU: Allocate the reversal to assets other than goodwill pro rata to carrying amounts; Each asset is capped at the lower of its recoverable amount (if determinable) and its depreciated historical carrying amount.
Accounting for the loss: Cost model: loss in profit or loss. Revalued asset: treat the loss as a revaluation decrease, charged to OCI only up to the revaluation surplus held for that same asset, with any excess going to profit or loss; A reversal on a revalued asset goes to OCI as a surplus, except to the extent it reverses an earlier loss taken to profit or loss.
Goodwill with partial goodwill method: Gross up goodwill for the non-controlling interest before testing; Add notional goodwill of the NCI to the CGU and test the grossed-up amount. Allocate the loss to goodwill first, but recognise only the parent's share of the goodwill impairment. The NCI share of the goodwill loss is not recognised. Losses on other assets are shared between the parent and the NCI under the usual ownership split.

How to solve IAS 36 Impairment of Assets questions

Use this order for any impairment question, whether one asset or a group.

1Check for indicators, or whether the asset is one that needs an annual test (goodwill, indefinite life intangibles, intangibles not yet in use).
2Decide the level of test: single asset if it generates independent cash inflows, otherwise the CGU. Allocate goodwill and any corporate assets to the CGU.
3Write down the carrying amount of the CGU, including goodwill. Under partial goodwill, gross up goodwill for the NCI.
4Find recoverable amount: FVLCD and VIU, and take the higher. Stop early if one figure exceeds carrying amount.
5Calculate the total impairment loss: carrying amount less recoverable amount.
6Allocate the loss: goodwill first, then other assets pro rata. Apply the floor for any asset whose FVLCD or VIU is known.
7Post the entries: cost model to profit or loss; revalued assets against surplus first. Under partial goodwill, split the loss between parent and NCI.
8In later years, review for reversal on non-goodwill assets, capped at depreciated historical carrying amount. Redo depreciation on the revised carrying amount.

Quickest way: Fast CGU impairment table

When to use it: Use for any CGU question with goodwill and several assets, when time is short.

Draw a three-column table: asset, carrying amount before, impairment and after.
Total the carrying amount and subtract recoverable amount to get the loss.
Take the loss against goodwill first. Write the remainder to be shared.
Share the remainder over the other assets by their carrying amount share. Check no asset falls below its own FVLCD.
Check that the after column adds up to recoverable amount. This confirms the arithmetic.

Common mistakes in IAS 36 Impairment of Assets

Comparing carrying amount with the lower of FVLCD and VIU.
Students think prudence means choosing the lower figure.
Fix: Recoverable amount is always the higher of the two. The asset is impaired only if both are below carrying amount.
Spreading the CGU loss across all assets including goodwill pro rata.
Pro rata allocation is the most familiar technique.
Fix: Write goodwill off first. Only the balance goes pro rata to the other assets.
Reducing an asset below its own fair value less costs of disposal in the allocation.
The floor rule is easy to forget under time pressure.
Fix: Check each asset after allocating. If it breaches the floor, cap it and share the excess over the remaining assets.
Reversing a goodwill impairment, or reversing above the depreciated historical cost.
Students treat reversal as restoring the old carrying amount without allowing for depreciation.
Fix: Never reverse goodwill. For other assets, compute what the carrying amount would have been with no impairment, after depreciation, and cap at that.
Ignoring the non-controlling interest when goodwill is measured under the partial method.
Goodwill in the consolidated statement of financial position excludes the NCI share.
Fix: Gross up goodwill to include the NCI share before testing. Allocate the loss to goodwill first, but recognise only the parent's share of the goodwill impairment. The NCI share of the goodwill loss is not recognised. Losses on other assets are shared between the parent and the NCI by ownership.
Including future restructuring, tax payments or financing cash flows in value in use.
Scenario information mixes all forecast cash flows together.
Fix: Use pre-tax cash flows from the asset in its current condition. Exclude financing, tax and uncommitted restructuring or enhancement.

Worked examples

Example 1

Delta has a cash-generating unit with these carrying amounts: goodwill $20m, plant $50m, buildings $30m, net current assets $10m (carried at amounts equal to their recoverable amounts). The unit's fair value less costs of disposal is $70m and its value in use is $75m. Calculate the impairment loss and show how it is allocated.

Show the solution

Carrying amount of the CGU = 20 + 50 + 30 + 10 = $110m.
Recoverable amount is the higher of 70 and 75, which is $75m.
Impairment loss = 110 − 75 = $35m.
Goodwill is written off first: $20m. Remaining loss = $15m.
Net current assets are already at recoverable amount, so they are not reduced in practice. Share the $15m over plant and buildings by carrying amounts 50 : 30.
Plant: 15 × 50/80 = $9.375m. Buildings: 15 × 30/80 = $5.625m.
Closing carrying amounts: goodwill nil, plant $40.625m, buildings $24.375m, net current assets $10m. Total = $75m, which equals recoverable amount.

Answer: Total impairment loss $35m: goodwill $20m, plant $9.375m, buildings $5.625m. The CGU is carried at $75m.

Example 2

At 1 January Year 1, Beta bought equipment for $100,000 with a five-year life and no residual value, using the straight-line method and the cost model. At 31 December Year 2 its recoverable amount was $36,000. At 31 December Year 3 its recoverable amount was $50,000. The useful life is unchanged. Show the accounting for Years 2 and 3.

Show the solution

Annual depreciation = 100,000 ÷ 5 = $20,000.
Carrying amount at 31 December Year 2 before impairment = 100,000 − 40,000 = $60,000.
Impairment loss Year 2 = 60,000 − 36,000 = $24,000, charged to profit or loss. Carrying amount becomes $36,000.
Remaining life is 3 years. Year 3 depreciation = 36,000 ÷ 3 = $12,000. Carrying amount at 31 December Year 3 before reversal = $24,000.
Carrying amount had there been no impairment = 100,000 − 60,000 = $40,000.
Recoverable amount is $50,000, which is above $40,000. The reversal is capped at $40,000.
Reversal = 40,000 − 24,000 = $16,000, recognised in profit or loss for a cost-model asset.

Answer: Year 2 impairment loss is $24,000. In Year 3 depreciation is $12,000 and the reversal is $16,000, giving a carrying amount of $40,000 at 31 December Year 3.

Exam tips

Always state the recoverable amount as the higher of FVLCD and VIU, and explain why. Written questions award marks for the reasoning as well as the figure.
In group questions, check whether goodwill is under the full or partial method before you test. Gross up for the NCI if it is partial.
Show the floor test on each asset in the allocation. If a question gives the fair value of one asset, it is a hint that the floor applies.
For discussion parts, link to professional scepticism: question optimistic cash flow forecasts and discount rates used to avoid an impairment, and say why that matters for users and ethics.
Do depreciation after the impairment on the new carrying amount over the remaining life. Then apply the reversal cap using the depreciated historical amount.

Practice questions from Non-current assets

IAS 36 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.

IAS 36 Impairment of Assets: frequently asked questions

What is the difference between value in use and fair value less costs of disposal?

Value in use is the present value of cash flows the entity expects from using the asset and disposing of it at the end of its life, which is entity-specific. Fair value less costs of disposal is the price a market participant would pay, less direct selling costs. Recoverable amount is the higher of the two.

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

First reduce goodwill allocated to the unit to zero. Then allocate the remaining loss to the other assets pro rata to their carrying amounts. No asset can go below the highest of its FVLCD, its VIU and zero, and any excess is shared among the other assets.

Can an impairment loss on goodwill be reversed?

No. IAS 36 prohibits reversal of a goodwill impairment loss. Reversals are allowed for other assets if the estimates used to measure recoverable amount have changed, up to the depreciated carrying amount the asset would have had without the impairment.

When must goodwill be tested for impairment?

At least annually, and also whenever there is an indicator of impairment. The same applies to intangible assets with an indefinite useful life and intangible assets not yet available for use.