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Financial Reporting · Ind AS 36 Impairment of Assets

Ind AS 36: Scope, Definitions and Identifying an Impaired Asset

Updated 5 October 2026 · Fact-checked

Ind AS 36 ensures assets are not carried above the amount the entity can recover from them. An asset is impaired when its carrying amount exceeds its recoverable amount, the higher of fair value less costs of disposal and value in use. At each reporting date, scan for internal and external indicators, and test only if one exists.

Understand Scope, Definitions and Identifying an Impaired Asset

An asset is bought to earn money, either by using it or by selling it. If the books show ₹10 crore but the most you can ever get back is ₹7 crore, the asset is overstated. Ind AS 36 forces you to write it down to what is recoverable. That is the whole idea.

The standard applies to most assets, including property, plant and equipment, intangibles, goodwill, and investments in subsidiaries, joint ventures and associates. For equity-accounted investments, Ind AS 28 requires the entire carrying amount of the investment to be tested as a single asset under Ind AS 36 when there is an indication of impairment. The standard does not apply to assets covered by other standards with their own measurement rules. Examples are inventories (Ind AS 2), contract assets and contract-cost assets (Ind AS 115), deferred tax assets (Ind AS 12), employee benefit assets (Ind AS 19), financial assets within the scope of Ind AS 109, investment property at fair value (Ind AS 40), biological assets at fair value less costs to sell (Ind AS 41), and non-current assets held for sale (Ind AS 105). Note that investments in subsidiaries, joint ventures and associates are not within Ind AS 109 for this purpose, so they stay within Ind AS 36.

Key definitions: Carrying amount is the amount at which the asset is recognised after deducting accumulated depreciation or amortisation and accumulated impairment losses. Fair value less costs of disposal (FVLCD) is fair value under Ind AS 113 minus the direct incremental costs of disposal, excluding finance costs and income tax expense. Value in use (VIU) is the present value of the future cash flows expected from the continued use of the asset and from its disposal at the end of its life. Recoverable amount is the higher of FVLCD and VIU. Impairment loss is the excess of carrying amount over recoverable amount.

The difference between FVLCD and VIU is the common exam question. FVLCD is a market-participant view of what you would get by selling. VIU is an entity-specific view of what you would get by using. You take the higher because a rational entity would choose the better route, sell or keep.

You do not test every asset every year. At the end of each reporting period you assess whether there is any indication of impairment. If yes, estimate recoverable amount. Goodwill, intangibles with indefinite useful lives and intangibles not yet available for use must be tested annually, whether or not there is an indication. Indicators fall into external sources (market, economic, legal environment) and internal sources (physical damage, obsolescence, plans to restructure or dispose, poor performance).

Key rules to remember

Recoverable amount
Recoverable amount = Higher of (FVLCD, Value in use)
If either one exceeds the carrying amount, the asset is not impaired and you need not estimate the other.
Fair value less costs of disposal
FVLCD = Fair value (Ind AS 113) − Direct incremental costs of disposal
Costs include legal costs, stamp duty and transaction taxes, and costs of removing the asset. Finance costs and income tax expense are excluded.
Value in use
VIU = Σ [Expected future cash flow ÷ (1 + r)^t], including net disposal proceeds at end of life
Cash flows are pre-tax and exclude financing and tax receipts or payments. The discount rate is also pre-tax.
Impairment loss
Impairment loss = Carrying amount − Recoverable amount, if carrying amount > recoverable amount
Recognised immediately in profit or loss, unless the asset is carried at a revalued amount, in which case it is treated as a revaluation decrease.
Annual test rule
Test every year: goodwill acquired in a business combination, indefinite-life intangibles, intangibles not yet available for use
For all other assets, test only if an indicator exists at the reporting date.
Indicator rule
Indicator exists → estimate recoverable amount; no indicator → no estimate needed
Also consider whether the remaining useful life, depreciation method or residual value needs review under the relevant standard, even if no impairment is recognised.

How to solve Scope, Definitions and Identifying an Impaired Asset questions

Use this sequence for any scenario on scope, definitions or identifying impairment.

  1. 1Check scope. Is the asset excluded because another Ind AS governs its measurement (inventory, deferred tax, financial assets, held for sale and so on)? If excluded, say so and stop.
  2. 2Decide whether an annual test is compulsory: goodwill, indefinite-life intangible or intangible not yet available for use. If yes, test regardless of indicators.
  3. 3For other assets, list external indicators found in the case: fall in market value, adverse technology, market, economic or legal change, higher market interest rates, and net assets exceeding market capitalisation.
  4. 4List internal indicators: obsolescence or physical damage, idle asset, restructuring or disposal plan, worse economic performance than expected, and cash flow or operating loss evidence.
  5. 5Conclude whether an indication exists. Note that a rise in market interest rates is an indicator only if it is likely to affect the discount rate used in value in use materially.
  6. 6If an indicator exists, estimate recoverable amount as the higher of FVLCD and VIU. If one figure exceeds the carrying amount, stop.
  7. 7Compare recoverable amount with carrying amount. If lower, the asset is impaired and the loss is the difference.
  8. 8Write the answer in provision, facts and conclusion form, citing the indicator or rule you applied.

Quickest way: Scope, then trigger, then compare

When to use it: Use for MCQs and short case questions where you must decide quickly whether an asset needs an impairment test or what recoverable amount is.

  1. Ask: is the asset outside Ind AS 36? Cross it out if yes.
  2. Ask: is it goodwill or an indefinite-life or not-ready intangible? Then test is mandatory.
  3. Otherwise scan the case for one trigger word: obsolete, idle, damaged, restructuring, market fall, losses, higher interest rates.
  4. Compute recoverable amount as the larger of the two figures given. Never add or average them.
  5. Compare with carrying amount. Loss equals the shortfall, if any.

Common mistakes in Scope, Definitions and Identifying an Impaired Asset

  • Taking the lower of FVLCD and VIU as recoverable amount.

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

    Fix: Recoverable amount is always the higher. Use the lower figure only if the case explicitly asks for it, which it will not.

  • Applying Ind AS 36 to inventories, deferred tax assets or financial assets.

    The word impairment is used for these as well, such as expected credit loss under Ind AS 109.

    Fix: Check the scope list first. Inventories use NRV, financial assets use the expected credit loss model, and deferred tax follows Ind AS 12.

  • Deducting finance costs or income tax from the disposal price while computing FVLCD.

    Students treat all costs of sale as deductible.

    Fix: Deduct only direct incremental costs of disposal. Finance costs and income tax expense are specifically excluded.

  • Testing all assets every year or skipping the annual test for goodwill when there is no indicator.

    Confusing the general indicator-based approach with the special annual test.

    Fix: Remember the three annual-test categories. Everything else is indicator-driven.

  • Including tax cash flows or financing flows in value in use and using a post-tax rate.

    Mixing up VIU with project appraisal in the AFM paper.

    Fix: Use pre-tax cash flows, no financing flows and a pre-tax discount rate in VIU.

  • Treating every rise in interest rates as an impairment indicator.

    Students memorise the indicator without its condition.

    Fix: State the condition: the rise must be likely to affect the discount rate used for VIU and decrease recoverable amount materially.

Worked examples

Example 1

Case: Zenith Ltd (an Ind AS company) has at 31 March 2027 the following items: (a) inventory of finished goods, (b) goodwill of ₹4,00,000 from acquiring a subsidiary in 2024, (c) a machine in regular use with no adverse signs, (d) a deferred tax asset. Which items must be tested under Ind AS 36 for impairment at this date?

Show the solution
  1. Check scope. Inventory falls under Ind AS 2 (lower of cost and NRV). Deferred tax asset falls under Ind AS 12. Both are outside Ind AS 36.
  2. Goodwill acquired in a business combination must be tested for impairment annually, whether or not any indicator exists.
  3. The machine is in scope, but it is not in a mandatory annual-test category. Facts show no internal or external indicator, so no estimate of recoverable amount is needed.
  4. Conclusion: only the goodwill must be tested at this date.

Answer: Only goodwill (₹4,00,000) must be tested. Inventory and the deferred tax asset are outside Ind AS 36, and the machine needs no test as no indicator exists.

Example 2

Case: Orion Ltd owns a plant with a carrying amount of ₹50,00,000. A new government regulation makes the plant's output uneconomic, and the plant is lying idle. The plant could be sold for ₹42,00,000, with legal and transfer costs of ₹2,00,000 and a loan-processing fee of ₹50,000 linked to the buyer's financing. Value in use is estimated at ₹39,00,000. Is the plant impaired, and by how much?

Show the solution
  1. Indicators: an adverse change in the legal environment (external) and the plant being idle (internal). An indicator exists, so estimate recoverable amount.
  2. FVLCD: fair value ₹42,00,000 less direct incremental disposal costs ₹2,00,000 = ₹40,00,000. The loan-processing fee relates to the buyer's financing, so it is not an incremental cost of disposal incurred by Orion and is excluded.
  3. Value in use is ₹39,00,000.
  4. Recoverable amount is the higher of ₹40,00,000 and ₹39,00,000 = ₹40,00,000.
  5. Carrying amount ₹50,00,000 exceeds recoverable amount ₹40,00,000, so the plant is impaired.
  6. Impairment loss = ₹50,00,000 − ₹40,00,000 = ₹10,00,000, recognised immediately in profit or loss (assuming the plant is carried at cost).

Answer: The plant is impaired. Recoverable amount is ₹40,00,000 (FVLCD) and the impairment loss is ₹10,00,000.

Exam tips

  • Start every case answer with scope. A one-line exclusion, such as inventory under Ind AS 2, often earns a mark on its own.
  • Learn the indicator list as two groups, external and internal, and quote the matching fact from the case in your answer.
  • In numerical questions, show FVLCD and VIU as separate lines, then state the higher as recoverable amount. Marks are given for each step.
  • For MCQs, watch for words such as annual, goodwill, indefinite life and not yet available for use. These signal a compulsory test.
  • When asked to distinguish VIU and FVLCD, give the basis (entity-specific versus market participant), the cash flows involved and the treatment of costs.

Practice questions from Ind AS 36 Impairment of Assets

Scope, Definitions and Identifying an Impaired Asset in other exams

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

Scope, Definitions and Identifying an Impaired Asset: 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 its final disposal. Fair value less costs of disposal is the price a market participant would pay, reduced by direct disposal costs. VIU is entity-specific; FVLCD is market-based.

Do I have to estimate both VIU and FVLCD every time?

No. If either amount exceeds the carrying amount, the asset is not impaired and you need not estimate the other. Also, if FVLCD cannot be measured reliably, you may use VIU as the recoverable amount.

Which assets must be tested for impairment every year?

Goodwill acquired in a business combination, intangible assets with an indefinite useful life, and intangible assets not yet available for use. This test is required whether or not any indicator exists.

What are the main external and internal indicators of impairment?

External indicators include a significant fall in market value, adverse changes in technology, markets, economy or law, higher market interest rates, and net assets exceeding market capitalisation. Internal indicators include obsolescence or physical damage, idle assets, restructuring or disposal plans, and economic performance worse than expected.