Advanced Accounting · AS 28 Impairment of Assets

AS 28 Impairment of Assets: Identifying an Impaired Asset and Indications of Impairment

Updated 4 October 2026 · Fact-checked

An asset is impaired when its carrying amount is more than its recoverable amount. Under AS 28, at each balance sheet date you look for any indication of impairment, using external and internal sources of information. If an indication exists, you estimate the recoverable amount. If none exists, you need not estimate it.

Understand Identifying an Impaired Asset and Indications of Impairment

An asset sits in the balance sheet at its carrying amount, which is cost less accumulated depreciation and past impairment losses. The business expects to recover that amount by using the asset or selling it. If the expected recovery is lower than the carrying amount, the asset is overstated. That is an impairment.

Recoverable amount is the higher of an asset's net selling price and its value in use. An asset is impaired when carrying amount is greater than recoverable amount. The loss is the difference. This topic is about the first question only: how do you know whether to test at all?

AS 28 does not ask you to compute recoverable amount for every asset every year. At each balance sheet date, the enterprise must assess whether there is any indication that an asset may be impaired. If there is, it estimates the recoverable amount. If there is none, no estimate is needed. This saves effort and keeps the test practical.

The indications come from two sources. External sources are things outside the business, such as a fall in market value, adverse changes in technology, market, economy or law, higher interest rates, or net assets exceeding market capitalisation. Internal sources are things inside the business, such as obsolescence or physical damage, the asset becoming idle, plans to discontinue or restructure, or worse than expected economic performance.

The list is not exhaustive. An enterprise may find other indications. Also, if an indication exists, it may signal that the useful life, depreciation method or residual value needs review, even if no impairment loss is finally recognised.

There is one exception to the "test only if there is an indication" rule. Under AS 28, the recoverable amount must be estimated at least at each financial year end, whether or not an indication exists, for two kinds of intangible asset:

an intangible asset that is not yet available for use, and
an intangible asset that is amortised over a period of more than ten years.

Goodwill is an intangible asset, so this rule covers goodwill too, including goodwill from an amalgamation in the nature of purchase. If goodwill is amortised over more than ten years, you estimate its recoverable amount every year.

AS 26 presumes that the useful life of an intangible asset is up to ten years. A life longer than ten years rebuts that presumption, so it must be justified. When a longer life is justified, the annual test follows automatically.

Key rules to remember

Impaired asset: Asset is impaired if Carrying amount > Recoverable amount; Carrying amount is after depreciation and any earlier impairment loss.
Recoverable amount: Recoverable amount = Higher of (Net selling price, Value in use); Use the higher figure because the business would choose the better way to recover value.
Impairment loss: Impairment loss = Carrying amount − Recoverable amount; Only when carrying amount is higher. Otherwise there is no loss.
Review rule: At each balance sheet date: assess for any indication of impairment; If an indication exists, estimate recoverable amount. If none exists, no estimate is needed.
Mandatory annual test: Estimate recoverable amount every year for: intangible not yet available for use, and intangible amortised over more than 10 years; Done at least at each financial year end, with or without an indication. This includes goodwill amortised over more than 10 years. AS 26 presumes a life of up to 10 years, so a longer life must be justified (the presumption is rebutted).

How to solve Identifying an Impaired Asset and Indications of Impairment questions

Use this method for any question that asks whether an asset is impaired or whether a test is required.

1Note the carrying amount of the asset at the balance sheet date, after depreciation up to that date.
2Check the asset type. If it is an intangible asset not yet available for use, or one amortised over more than 10 years (this includes goodwill amortised over more than 10 years), a recoverable amount estimate is needed every year regardless of indications. Remember that AS 26 presumes a life of up to 10 years, so a longer life must be justified.
3For other assets, scan the facts for indications. Tag each as external (market, technology, law, interest rates, market capitalisation) or internal (damage, obsolescence, idle, restructuring plans, poor performance).
4If at least one indication exists, state that recoverable amount must be estimated. If none exists, state that no estimate is required.
5Where figures are given, find net selling price and value in use, and take the higher as recoverable amount.
6Compare carrying amount with recoverable amount. If carrying amount is higher, the asset is impaired and the loss is the difference.
7Write the conclusion in one line, with the reason, and mention any review of useful life or depreciation if indications exist.

Quickest way: Indicator scan and compare

When to use it: For MCQs and short written parts where facts are given and you must decide if testing or an impairment arises.

For an MCQ, first decide: is it asking for a test trigger, or for the loss? A trigger question needs no calculation.
Sort each fact quickly into external or internal. Anything showing lower value, worse conditions or unused assets is an indicator.
Remember that a rise in market interest rates affecting the discount rate is an external indicator. A fall in rates is not.
Check for the mandatory annual test cases before anything else: intangible not yet in use, or amortised over more than 10 years. Goodwill is covered too, so look at its amortisation period. A period over 10 years needs the annual test and must be justified, since AS 26 presumes up to 10 years.
If numbers are given, compute loss as carrying amount minus the higher of net selling price and value in use. Eliminate options that use the lower figure.
In written answers, use the format: provision, facts, conclusion. State the AS 28 rule, apply the facts, then conclude clearly.

Common mistakes in Identifying an Impaired Asset and Indications of Impairment

Testing every asset every year by computing recoverable amount.
Students assume annual impairment testing applies to all assets.
Fix: Only assess for indications each year. Estimate recoverable amount only if an indication exists, except for the mandatory annual test cases.
Forgetting the mandatory annual test for intangibles not yet available for use or amortised over more than 10 years.
Students remember the indication rule and apply it to everything.
Fix: Keep a one-line memory: intangibles not in use or amortised over more than 10 years are tested every year.
Treating goodwill as outside the annual test rule for intangibles.
Students think the annual test belongs only to special intangibles such as patents, and forget that goodwill is also an intangible asset.
Fix: Goodwill follows the same rule as any intangible. If it is amortised over more than 10 years, estimate its recoverable amount every year. AS 26 presumes a life of up to 10 years, so a longer period must be justified.
Treating a fall in market interest rates as an indicator.
Students remember interest rates as an indicator but not the direction.
Fix: Rising rates lower value in use, so they indicate impairment. Falling rates do not.
Calling an asset impaired because it has been depreciated heavily.
Students confuse depreciation with impairment.
Fix: Depreciation spreads cost over useful life. Impairment is a shortfall of recoverable amount against carrying amount. Compare these two figures.
Using the lower of net selling price and value in use as recoverable amount.
Students mix this with the prudence idea of lower of cost and NRV.
Fix: Recoverable amount is the higher of the two. Write it down before you compute.
Treating the list of indicators as complete.
Students memorise the list literally.
Fix: The list is illustrative. Any other evidence that the asset may be impaired also counts.

Worked examples

Example 1

A company has a machine with carrying amount ₹40,00,000 at the balance sheet date. During the year, a new law banned the product the machine makes, and the machine has been idle for three months. The finance manager says no impairment test is needed as the machine is still depreciated regularly. Advise whether the company must estimate recoverable amount.

Show the solution

AS 28 requires an assessment at each balance sheet date for any indication of impairment.
The new law banning the product is an adverse change in the legal environment. This is an external indicator.
The machine being idle is an internal indicator.
Regular depreciation does not remove the need for the assessment. Depreciation and impairment are separate.
Since indications exist, the recoverable amount must be estimated.

Answer: The company must estimate the recoverable amount of the machine, because both an external indicator (adverse legal change) and an internal indicator (idle asset) exist. If recoverable amount is below ₹40,00,000, an impairment loss arises. Useful life and depreciation method should also be reviewed.

Example 2

At the year end, a company has three items: (a) A patent not yet available for use, carrying amount ₹10,00,000, with no sign of problems. (b) A delivery van with carrying amount ₹6,00,000, with no indication of impairment. (c) A plant with carrying amount ₹50,00,000, net selling price ₹38,00,000 and value in use ₹45,00,000. State for which items recoverable amount must be estimated and compute any impairment loss.

Show the solution

Item (a): an intangible asset not yet available for use must be tested every year, so recoverable amount must be estimated even without an indication.
Item (b): no indication exists and it is not a mandatory test case, so no estimate is required.
Item (c): recoverable amount is the higher of ₹38,00,000 and ₹45,00,000, which is ₹45,00,000.
Carrying amount ₹50,00,000 is greater than recoverable amount ₹45,00,000, so the plant is impaired.
Impairment loss = ₹50,00,000 − ₹45,00,000 = ₹5,00,000.

Answer: Estimate recoverable amount for the patent (mandatory annual test) and the plant (impaired). No estimate is needed for the delivery van. The impairment loss on the plant is ₹5,00,000.

Exam tips

In MCQs, watch for the word "indication". If a fact lists a market, legal, technology or performance problem, the answer is usually that a test is needed.
Always tag indicators as external or internal in written answers. It shows structure and earns step marks.
State the rule first, then apply the facts, then conclude. This provision-facts-conclusion format suits AS 28 case questions.
When numbers are given, write recoverable amount as the higher of net selling price and value in use before comparing with carrying amount.
Do not forget the mandatory annual test for intangibles not yet in use or amortised over more than 10 years. Examiners like to hide this in a case. Goodwill is an intangible too, so check its amortisation period, and remember that a period over 10 years rebuts the AS 26 presumption and must be justified.

Practice questions from AS 28 Impairment of Assets

Identifying an Impaired Asset and Indications of Impairment in other exams

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

Identifying an Impaired Asset and Indications of Impairment: frequently asked questions

When does AS 28 require an asset to be tested for impairment?

At each balance sheet date, you must assess whether any indication of impairment exists. If one does, you estimate recoverable amount. Some intangible assets, including goodwill amortised over more than 10 years, are tested every year regardless of indications.

What are the external indicators of impairment under AS 28?

They include a significant fall in market value, adverse changes in technology, market, economy or law, a rise in market interest rates that affects the discount rate, and net assets of the enterprise exceeding its market capitalisation.

What are the internal indicators of impairment?

They include evidence of obsolescence or physical damage, the asset becoming idle, plans to discontinue or restructure the operation, and evidence that the asset's economic performance is or will be worse than expected.

Is an asset impaired if its market value falls?

A fall in market value is only an indication, not proof. You must then estimate recoverable amount and compare it with carrying amount. The asset is impaired only if carrying amount is higher.