Strategic Performance Management and Business Valuation · Valuation of Assets and Liabilities

Impairment of Assets and Fair Value Adjustments (Ind AS 36)

Updated 11 October 2026 · Fact-checked

Impairment means an asset's carrying amount is higher than what you can recover from it. Under Ind AS 36, find the recoverable amount, which is the higher of fair value less costs of disposal and value in use. If carrying amount exceeds it, the excess is the impairment loss. Write the asset down to that amount.

Understand Impairment and Fair Value Adjustments

An asset should not sit in the books at more than the benefit you can get from it. If it does, profit and net worth are overstated. Impairment testing fixes this. It compares the carrying amount with the recoverable amount.

Recoverable amount is the higher of two values. Fair value less costs of disposal (FVLCD) is what you would get by selling the asset in an orderly transaction between market participants, minus the direct costs of selling. Value in use (VIU) is the present value of the future cash flows you expect from using the asset and from its final disposal. The logic is simple: a rational owner would either sell or keep and use, whichever gives more. So the higher figure is the benefit available.

If carrying amount is more than recoverable amount, the asset is impaired. The loss is the difference. It goes to profit or loss. If the asset is carried at a revalued amount, the loss is treated first as a revaluation decrease, to the extent of the revaluation surplus held for that asset. After the loss, depreciation is charged on the new carrying amount over the remaining life.

You test at the level of the individual asset where its cash flows are largely independent. Where they are not, you test the cash-generating unit (CGU), the smallest group of assets generating largely independent cash inflows. Goodwill and intangible assets not yet available for use, or with indefinite life, are tested every year, whatever the signs. Other assets are tested only when there is an indication of impairment, for example a fall in market value, adverse changes in the market or law, obsolescence, physical damage, or poor economic performance.

For valuation work, the same thinking applies to fair value adjustments. You restate book values of assets and liabilities to fair value, so that an asset-based valuation reflects current worth instead of historical cost less depreciation. Impairment is one reason book value is above fair value. Always check which basis the question asks for.

Key rules to remember

Recoverable amount: Recoverable amount = Higher of (FVLCD, Value in use); If either one is above the carrying amount, the asset is not impaired and you need not estimate the other.
Fair value less costs of disposal: FVLCD = Fair value − Direct costs of disposal; Costs include legal costs and transaction costs of sale. Finance costs and tax expense are not disposal costs.
Value in use: VIU = Σ [Cash flow in year t ÷ (1 + r)^t], including net disposal proceeds at end of life; Use pre-tax cash flows and a pre-tax discount rate. Exclude financing cash flows, tax receipts or payments, and enhancement of the asset's performance not yet committed.
Impairment loss: Impairment loss = Carrying amount − Recoverable amount (only if positive); Recognise in profit or loss, or against revaluation surplus for a revalued asset.
Allocation of CGU loss: Step 1: reduce goodwill. Step 2: reduce other assets pro rata to carrying amounts.; No asset is reduced below the highest of its FVLCD, its VIU (if determinable) and zero.
Reversal limit: Reversal ≤ Carrying amount that would have existed (net of depreciation) had no impairment been recognised; Reversal is allowed for assets other than goodwill. Impairment of goodwill is never reversed.

How to solve Impairment and Fair Value Adjustments questions

Use this order for any impairment or fair value adjustment question. It keeps your working clear and earns method marks.

1Identify the asset or CGU and check whether a test is needed: annual for goodwill and indefinite-life intangibles, otherwise only on an indication.
2Compute the carrying amount: cost less accumulated depreciation and earlier impairment, with goodwill included if testing a CGU.
3Compute FVLCD: fair value less direct selling costs.
4Compute VIU: list cash flows, remove tax, financing and unapproved expansion, and discount at the given rate. Add disposal proceeds in the final year.
5Take recoverable amount as the higher of FVLCD and VIU.
6Compare with carrying amount. If carrying amount is higher, impairment loss = difference. Otherwise state no impairment.
7For a CGU, allocate the loss to goodwill first, then pro rata to other assets, respecting the floor for each asset.
8State the journal or effect on profit, the new carrying amount and the revised depreciation. For valuation questions, state the adjusted fair value of net assets.

Quickest way: Compare, then allocate

When to use it: Use in MCQs and short numerical questions when time is tight.

Write three numbers in a row: carrying amount, FVLCD, VIU.
Pick the larger of FVLCD and VIU. This is the recoverable amount.
Subtract it from carrying amount. If the result is zero or negative, the answer is no impairment.
For a CGU, apply the loss to goodwill first, then spread the rest by carrying amounts.
Check that no single asset falls below its own FVLCD, or zero.

Common mistakes in Impairment and Fair Value Adjustments

Taking the lower of FVLCD and VIU as recoverable amount.
Students mix this up with the 'lower of cost and net realisable value' rule for inventory.
Fix: Remember that recoverable amount is the higher of the two. The owner would choose the better route, sell or use.
Including tax and interest cash flows in value in use.
The question lists all cash flows, and students discount them all.
Fix: Use only operating cash flows before tax and finance charges, and use a pre-tax discount rate.
Forgetting to deduct disposal costs from fair value.
Students treat fair value and FVLCD as the same figure.
Fix: Always subtract direct selling costs. Compare the result, not the gross fair value, with VIU.
Allocating a CGU loss pro rata across all assets, including goodwill.
Pro rata allocation feels fair and is easy.
Fix: Reduce goodwill first. Only the remaining loss is shared among other assets in proportion to carrying amounts.
Reversing an impairment loss without a cap, or reversing goodwill.
Students assume the asset goes back to its higher recoverable amount.
Fix: Cap the reversal at the carrying amount that would have existed, net of depreciation, had no loss been booked. Never reverse goodwill impairment.
Not charging depreciation on the revised carrying amount afterwards.
The question stops at the loss, and students stop too.
Fix: After impairment, depreciate the new carrying amount over the remaining useful life, less residual value.

Worked examples

Example 1

Sharma Textiles Ltd owns a machine with a carrying amount of ₹48,00,000. Its fair value is ₹42,00,000 and costs of disposal are ₹1,50,000. Expected pre-tax cash flows from use are ₹14,00,000 a year for 3 years, with no disposal proceeds at the end. The pre-tax discount rate is 10%. Present value factors at 10%: year 1 = 0.9091, year 2 = 0.8264, year 3 = 0.7513. Find the impairment loss.

Show the solution

FVLCD = 42,00,000 − 1,50,000 = ₹40,50,000.
Sum of present value factors = 0.9091 + 0.8264 + 0.7513 = 2.4868.
VIU = 14,00,000 × 2.4868 = ₹34,81,520.
Recoverable amount = higher of 40,50,000 and 34,81,520 = ₹40,50,000.
Carrying amount 48,00,000 exceeds recoverable amount, so the machine is impaired.
Impairment loss = 48,00,000 − 40,50,000 = ₹7,50,000.

Answer: Impairment loss is ₹7,50,000, charged to profit or loss. The machine is carried at ₹40,50,000 afterwards.

Example 2

Kaveri Foods Ltd has a CGU with these carrying amounts: goodwill ₹20,00,000, plant ₹60,00,000, building ₹40,00,000 and other assets ₹20,00,000. The recoverable amount of the CGU is ₹1,10,00,000. Allocate the impairment loss.

Show the solution

Total carrying amount = 20,00,000 + 60,00,000 + 40,00,000 + 20,00,000 = ₹1,40,00,000.
Impairment loss = 1,40,00,000 − 1,10,00,000 = ₹30,00,000.
Reduce goodwill first: 20,00,000 goes to zero. Remaining loss = ₹10,00,000.
Other assets total = 60,00,000 + 40,00,000 + 20,00,000 = ₹1,20,00,000.
Plant share = 10,00,000 × 60 ÷ 120 = ₹5,00,000.
Building share = 10,00,000 × 40 ÷ 120 = ₹3,33,333 (rounded).
Other assets share = 10,00,000 × 20 ÷ 120 = ₹1,66,667 (rounded).
Check: 5,00,000 + 3,33,333 + 1,66,667 = ₹10,00,000. Assume no asset falls below its own FVLCD.

Answer: Goodwill ₹20,00,000 written off; plant ₹5,00,000; building ₹3,33,333; other assets ₹1,66,667. Total loss ₹30,00,000. New carrying amounts: plant ₹55,00,000, building ₹36,66,667, other assets ₹18,33,333.

Exam tips

In MCQs, the trap is usually the higher or lower choice. Recoverable amount is always the higher of FVLCD and VIU.
Read for what to exclude from VIU: tax, financing, and future enhancement not yet committed. Strike these out before discounting.
In CGU questions, show goodwill written off first, then the pro rata table. Show a total check.
In valuation questions, say clearly whether you are using book value, impaired value or fair value, and give a closing adjusted net asset figure.
Add a one-line recommendation or effect on profit. Case-based questions reward the conclusion, not only the sum.

Practice questions from Valuation of Assets and Liabilities

Impairment and Fair Value Adjustments in other exams

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

Impairment and Fair Value Adjustments: 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, based on the entity's own plans. Fair value less costs of disposal is the market price a participant would pay, less selling costs. Recoverable amount is the higher of the two.

Do I need to calculate both values every time?

No. If either one is higher than the carrying amount, the asset is not impaired and you need not compute the other. In an exam, compute both if the question gives data for both, as marks are usually allotted for each.

Can an impairment loss be reversed?

Yes, for assets other than goodwill, if the estimates used to find recoverable amount have changed. The reversal cannot take the asset above the carrying amount it would have had, net of depreciation, if no loss had been recognised. Goodwill impairment is never reversed.

How is impairment linked to business valuation?

In an asset-based valuation, you adjust book values to fair value. An impaired asset is carried at no more than its recoverable amount, so book values may need restating. This gives a more realistic figure for net assets.