Corporate Financial Reporting · Impairment of Assets (Ind AS 36)

Ind AS 36 Scope, Definitions and Identifying Impairment Indicators

Updated 11 October 2026 · Fact-checked

Ind AS 36 makes sure assets are not carried above what the entity can recover from them. An impairment loss is the excess of carrying amount over recoverable amount, which is the higher of fair value less costs of disposal and value in use. At each reporting date, check internal and external indicators. If any exists, estimate recoverable amount.

Understand Scope, Definitions and Identifying Impairment Indicators

An asset is meant to bring in cash, either by using it or by selling it. If the amount in your books is more than you can get back, the asset is overstated. Ind AS 36 forces you to write it down. The write-down is an impairment loss.

The key terms come straight from the Standard. Carrying amount is what the asset is recognised at after deducting accumulated depreciation (amortisation) and accumulated impairment losses. Recoverable amount is the higher of fair value less costs of disposal and value in use. Fair value is the price received to sell an asset in an orderly transaction between market participants at the measurement date. Costs of disposal are incremental costs directly attributable to disposal, excluding finance costs and income tax expense. Value in use is the present value of future cash flows expected from the asset or cash-generating unit. A cash-generating unit (CGU) is the smallest identifiable group of assets that generates cash inflows largely independent of other assets or groups of assets.

On scope, the Standard does not apply to financial assets within Ind AS 109 or to biological assets measured at fair value less costs to sell under Ind AS 41. Other assets with their own standards (for example inventories, deferred tax assets and employee benefit assets) also have their own rules and are outside Ind AS 36. The Standard does apply to assets carried at revalued amount under Ind AS 16 or Ind AS 38. For a revalued asset, the only difference between fair value and fair value less costs of disposal is the disposal cost. If disposal costs are negligible, recoverable amount is close to or above the revalued amount, so the asset is unlikely to be impaired and you need not estimate recoverable amount. If disposal costs are not negligible, the asset is impaired when its value in use is below its revalued amount, so you apply the Standard.

You do not test every asset in detail every year. At the end of each reporting period you ask whether any indicator of impairment exists. If one does, you estimate recoverable amount. Separately, goodwill acquired in a business combination, intangible assets with indefinite useful lives and intangible assets not yet available for use must be tested every year, whether or not there is an indicator.

External indicators include: a significant fall in the asset's market value; adverse changes in the technological, market, economic or legal environment; higher market interest rates that raise the discount rate and cut value in use; and net assets of the entity being carried above its market capitalisation. Internal indicators include: evidence of obsolescence or physical damage; the asset becoming idle, or plans to discontinue, restructure or dispose of it earlier than expected; and internal reports showing economic performance worse than expected.

Key rules to remember

Recoverable amount: Recoverable amount = higher of (Fair value less costs of disposal, Value in use); Taken from the definition in the Standard. You need not compute both if one already exceeds the carrying amount.
Fair value less costs of disposal: Fair value less costs of disposal = Fair value − Costs of disposal; Costs of disposal are incremental and directly attributable. Finance costs and income tax expense are excluded.
Impairment loss: Impairment loss = Carrying amount − Recoverable amount, when carrying amount is higher; If recoverable amount is equal to or above carrying amount, there is no impairment loss.
Carrying amount of an asset: Carrying amount = Cost (or revalued amount) − Accumulated depreciation − Accumulated impairment losses; Always take it after depreciation up to the test date.
CGU carrying amount with liability: CGU carrying amount = Carrying amount of assets − Carrying amount of recognised liability that the buyer would assume; Deduct the same liability from value in use too, so the comparison is like for like. Example: mine with a restoration provision.
Revalued asset with negligible disposal costs: Disposal costs negligible → recoverable amount ≈ or > revalued amount → asset unlikely to be impaired; If disposal costs are not negligible, the asset is impaired when value in use is less than the revalued amount.

How to solve Scope, Definitions and Identifying Impairment Indicators questions

Use this order for scope, definition and indicator questions. It also sets up the numerical impairment steps that follow.

1Check scope first. Is the asset excluded (financial asset under Ind AS 109, biological asset under Ind AS 41, or covered by another standard)? If excluded, Ind AS 36 does not apply.
2Decide whether a test is mandatory regardless of indicators: goodwill from a business combination, indefinite-life intangibles, and intangibles not yet available for use.
3For all other assets, scan the facts for internal and external indicators and classify each correctly. One indicator is enough to trigger an estimate of recoverable amount.
4If the asset is revalued, check whether disposal costs are negligible. If they are, say recoverable amount need not be estimated.
5Identify the level of testing: individual asset, or CGU if the asset does not generate largely independent cash inflows (unless its fair value less costs of disposal exceeds carrying amount, or value in use is close to it and fair value less costs of disposal can be measured).
6Compute carrying amount, fair value less costs of disposal and value in use. Take the higher of the last two as recoverable amount.
7Compare. Impairment loss = carrying amount − recoverable amount if positive. State your conclusion in one line.

Quickest way: Trigger, then compare

When to use it: Use for MCQs and short case-based questions where you must decide quickly whether an impairment loss arises.

Look for a mandatory annual test or an indicator. No indicator and no mandatory test means no estimate is needed.
Compute fair value less costs of disposal: fair value minus only direct incremental disposal costs.
Take the value in use given. If either figure is above carrying amount, stop: no impairment.
Otherwise recoverable amount is the higher figure, and loss = carrying amount minus that figure.

Common mistakes in Scope, Definitions and Identifying Impairment Indicators

Taking the lower of fair value less costs of disposal and value in use as recoverable amount.
Students think of prudence and choose the smaller figure.
Fix: Recoverable amount is always the higher of the two. The entity can recover the better of selling or using.
Deducting finance costs or income tax from fair value when computing costs of disposal.
Any cost linked to the sale seems deductible.
Fix: Costs of disposal are incremental, directly attributable costs only. Finance costs and income tax expense are excluded.
Saying an impairment test is needed every year for all assets.
Mixing up the annual mandatory test with the indicator-based test.
Fix: Annual testing is only for goodwill from business combinations, indefinite-life intangibles and intangibles not yet available for use. Other assets are tested only if an indicator exists at the reporting date.
Treating a rise in market interest rates as irrelevant to impairment.
Students link interest rates only to borrowings.
Fix: Higher market rates raise the discount rate used for value in use, which lowers it. This is an external indicator, though you must still check whether it actually affects the asset.
Ignoring the liability when testing a CGU whose buyer would assume it, such as a restoration provision.
Focus is on asset values only.
Fix: Deduct the liability's carrying amount from the CGU's carrying amount and from its value in use, so that both sides are on the same basis.
Applying Ind AS 36 to a revalued asset, or ignoring it, without checking disposal costs.
Students assume revaluation makes impairment testing unnecessary or always necessary.
Fix: The Standard applies to revalued assets. If disposal costs are negligible, impairment is unlikely and recoverable amount need not be estimated. If not, compare value in use with the revalued amount.

Worked examples

Example 1

Sundaram Textiles Ltd has a weaving plant. At the reporting date, a new government import policy has made the plant's products uncompetitive, and the plant has been idle for three months. The company's net assets in its books are above its market capitalisation. The plant also has no goodwill or indefinite-life intangibles attached. Is an impairment estimate required? Classify the evidence.

Show the solution

Check scope. A plant is property, plant and equipment, not an excluded asset, so Ind AS 36 applies.
Check for a mandatory annual test. There is no goodwill, no indefinite-life intangible and no intangible not yet available for use, so none applies.
Classify the evidence. The import policy change is an adverse change in the legal or market environment, so it is an external indicator.
Net assets above market capitalisation is also an external indicator.
The plant being idle is an adverse change in the way the asset is used, so it is an internal indicator.
Any one indicator is enough.

Answer: Yes. Indicators exist (external: adverse policy change and net assets above market capitalisation; internal: idle plant), so Sundaram Textiles must estimate the plant's recoverable amount at the reporting date.

Example 2

Kaveri Machines Ltd tests a machine for impairment because of obsolescence. Carrying amount is ₹50,00,000. Its fair value is ₹46,00,000 and direct selling costs are ₹1,00,000. Finance cost on the loan taken for the machine is ₹80,000 and is not part of the sale. Value in use is ₹48,00,000. Compute the impairment loss.

Show the solution

Costs of disposal: only the direct incremental selling cost of ₹1,00,000. The finance cost is excluded.
Fair value less costs of disposal = ₹46,00,000 − ₹1,00,000 = ₹45,00,000.
Value in use = ₹48,00,000.
Recoverable amount = higher of ₹45,00,000 and ₹48,00,000 = ₹48,00,000.
Carrying amount ₹50,00,000 exceeds recoverable amount ₹48,00,000.
Impairment loss = ₹50,00,000 − ₹48,00,000 = ₹2,00,000.

Answer: Recoverable amount is ₹48,00,000 (value in use). Impairment loss is ₹2,00,000, recognised and the machine carried at ₹48,00,000.

Exam tips

Write the definition of recoverable amount in the first line of any numerical answer. Examiners award marks for stating the higher-of rule.
In case-based MCQs, sort each fact into internal or external indicator, and check whether the question hints at a mandatory annual test such as goodwill.
When a liability such as a restoration provision is given, deduct it from both carrying amount and value in use. This is a favourite trap.
For revalued assets, always check whether disposal costs are negligible. It decides whether any estimate is needed.
Show costs of disposal as a separate line so a reader sees you excluded finance costs and tax.

Practice questions from Impairment of Assets (Ind AS 36)

Scope, Definitions and Identifying Impairment Indicators 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 Impairment Indicators: frequently asked questions

When is an impairment test required under Ind AS 36?

At the end of each reporting period you assess whether any indicator of impairment exists, and if so you estimate recoverable amount. Goodwill from a business combination, indefinite-life intangibles and intangibles not yet available for use are tested every year regardless of indicators.

What are the main internal and external indicators of impairment?

External indicators include a significant fall in market value, adverse changes in the technological, market, economic or legal environment, higher market interest rates, and net assets exceeding market capitalisation. Internal indicators include obsolescence or physical damage, the asset becoming idle or planned for disposal or restructuring, and internal reports showing worse performance than expected.

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

Fair value is the price received to sell the asset in an orderly transaction between market participants. Fair value less costs of disposal is that price minus incremental costs directly attributable to the disposal, excluding finance costs and income tax expense.

Does Ind AS 36 apply to revalued assets?

Yes, it applies to assets carried at revalued amount under Ind AS 16 or Ind AS 38. If disposal costs are negligible, the asset is unlikely to be impaired and recoverable amount need not be estimated. If they are not negligible, the asset is impaired when value in use is below the revalued amount.