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How impairment of non-financial assets is tested and recognized under IAS 36 and ASC 360

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Impairment testing ensures that the carrying amount of tangible and intangible assets does not exceed the recoverable amount (IFRS) or fair value (US GAAP). Under IAS 36 (Impairment of Assets) and ASC 360 (Property, Plant, and Equipment), entities must assess at each reporting date whether indicators of impairment exist. When such indicators arise, the asset (or group of assets) must be written down to its recoverable amount or fair value less costs to sell. The key objective is to ensure that asset values on the balance sheet reflect their true economic potential.

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How impairment indicators are identified.

Indicators of impairment fall into external and internal categories.External indicators:

  • Significant decline in market value.

  • Adverse changes in technology, market, or legal environment.

  • Increases in discount rates or cost of capital.

  • Deterioration in macroeconomic or industry outlook.

Internal indicators:

  • Evidence of obsolescence or physical damage.

  • Plans to discontinue or restructure operations.

  • Declining performance of a cash-generating unit (CGU).

  • Continuing operating losses or negative cash flows.

Under IAS 36, if indicators exist, entities must estimate the recoverable amount. Under ASC 360, the trigger leads to a recoverability test comparing undiscounted cash flows to carrying amount.

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Measurement under IFRS (IAS 36).

1) Scope.IAS 36 applies to PPE (IAS 16), intangibles (IAS 38), investment property at cost (IAS 40), and right-of-use assets (IFRS 16). It excludes inventory, deferred tax assets, financial instruments, and biological assets.

2) Recoverable amount.Recoverable amount = higher of:

  • Fair value less costs of disposal (FVLCD), or

  • Value in use (VIU) — the present value of future cash flows expected from the asset or CGU.

3) Cash-generating units (CGUs).When assets do not generate independent cash inflows, test at the CGU level — the smallest identifiable group of assets generating largely independent inflows.

4) Impairment loss recognition.When carrying amount > recoverable amount:

  • Recognize impairment loss immediately in profit or loss.

  • Allocate to goodwill first, then pro-rata to other assets.

  • After impairment, recalculate depreciation on reduced carrying amounts.

Example — IAS 36 impairment of CGU:Carrying amount 5,000,000; recoverable amount 4,300,000.

  • Debit: Impairment Loss 700,000

  • Credit: Accumulated Impairment – CGU 700,000

5) Reversals.IAS 36 permits reversal (except for goodwill) when estimates change.

  • Debit: Accumulated Impairment 200,000

  • Credit: Reversal of Impairment Gain 200,000

Reversal limited to the carrying amount that would have been recognized net of depreciation if no impairment had occurred.

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Measurement under US GAAP (ASC 360).

1) Scope.ASC 360 covers long-lived tangible assets and definite-lived intangibles held for use or disposal.

2) Recoverability test.Two-step model:

  1. Step 1 — Recoverability: compare undiscounted expected future cash flows to carrying amount.

    • If carrying amount > undiscounted CFs → asset not recoverable.

  2. Step 2 — Measurement: write down to fair value (discounted CFs or market-based valuation).

3) Recognition and journal entry.If carrying amount 5,000,000; fair value 4,300,000:

  • Debit: Impairment Loss 700,000

  • Credit: Accumulated Impairment 700,000

4) No reversals.Under ASC 360, impairment losses cannot be reversed for assets held for use (unless reclassified to held for sale, in which case follow ASC 360-10-35-43 to -46).

5) Assets held for sale.Measure at lower of carrying amount or fair value less cost to sell; stop depreciation.

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Comparative table: IAS 36 vs ASC 360.

Aspect

IFRS (IAS 36)

US GAAP (ASC 360)

Trigger

Indicators of impairment

Indicators of impairment

Recoverability test

Direct comparison: carrying vs recoverable (discounted)

Step 1: Undiscounted cash flows test

Measurement

Recoverable = higher of FVLCD and VIU

Fair value (usually discounted cash flows)

Discounting

Required

Not required for recoverability test

CGU concept

Required if independent inflows not identifiable

Asset group (similar but less prescriptive)

Reversal of impairment

Allowed (except goodwill)

Prohibited for held-for-use assets

Held for sale

Lower of carrying or FVLCD

Same concept

Disclosure

Impairment amount, CGU details, assumptions (discount rate, growth)

Impairment amount and fair value estimation method

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How value in use (VIU) is calculated under IFRS.

Value in use represents the present value of future cash flows expected from the asset or CGU using a pre-tax discount rate reflecting current market assessments of time value and specific risks.

Components:

  • Cash flow projections for the asset’s useful life or until restructuring/closure.

  • Terminal value if applicable.

  • Discount rate derived from WACC, incremental borrowing rate, or CAPM-based model.

Example:Future annual cash flows (years 1–5): 1,000,000 each; terminal value 2,000,000; discount rate 10%.VIU = PV(1,000,000 for 5 years + 2,000,000 terminal) = ≈ 4,170,000.

If carrying amount 4,800,000 → impairment loss = 630,000.

Entry:

  • Debit: Impairment Loss 630,000

  • Credit: Accumulated Impairment 630,000

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Disclosures and presentation requirements.

IAS 36 requires:

  • For each CGU with significant goodwill or intangibles, disclose recoverable amount basis, discount rates, and key assumptions.

  • Amount of impairment/reversal recognized in profit or loss and OCI.

  • Segment-level allocation under IFRS 8.

ASC 360 requires:

  • Nature and facts of impairment.

  • Method of determining fair value (DCF, market, or appraisals).

  • If grouped, description of asset group composition.

Example disclosure extract:

CGU

Carrying Amount (USD)

Recoverable Amount (USD)

Loss Recognized (USD)

Discount Rate

Retail Division

12,500,000

11,700,000

800,000

9.5%

Logistics Assets

7,200,000

7,400,000

—

8.2%

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Journal entries for common impairment scenarios.

1) Individual asset impairment (IFRS or GAAP):

  • Debit: Impairment Loss xx

  • Credit: Accumulated Impairment xx

2) CGU-level impairment allocation (IFRS):

  • Debit: Impairment Loss 500,000

  • Credit: Goodwill 200,000

  • Credit: PPE 300,000

3) Reversal (IFRS only):

  • Debit: Accumulated Impairment 100,000

  • Credit: Reversal of Impairment Gain 100,000

4) Held-for-sale reclassification:

  • Debit: Assets Held for Sale xx

  • Credit: PPE xx

  • Adjust carrying amount to lower of cost or FVLCD.

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Impact on financial performance and ratios.

Impairment losses reduce operating profit, asset turnover, and ROA, while improving future depreciation ratios. Under IFRS, potential reversals add volatility but better reflect recovery in value. Under GAAP, the prohibition of reversals leads to more conservative balance sheets. Analysts assess the timing, magnitude, and consistency of impairments as indicators of management judgment and forecasting reliability.

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Operational considerations.

Entities should maintain a structured impairment testing calendar aligned with forecasting and budgeting cycles. Ensure:

  • Cash flow models reconcile with business plans.

  • Discount rates validated by finance and valuation specialists.

  • Sensitivity analyses performed for key variables (growth, discount rate, terminal value).

  • Documentation supports CGU aggregation rationale and goodwill allocation.

Transparent impairment testing reinforces investor confidence that asset values reflect economic reality and management discipline.

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