Overview and Scope
The updated IAS 36 guidance for 2026 reinforces the fundamental principle that assets must not be carried above their recoverable amount. For practitioners, the practical challenge remains consistent: identifying when impairment testing is required and applying the calculations correctly.
The standard applies primarily to property, plant and equipment (IAS 16), intangible assets (IAS 38), goodwill (IFRS 3), right-of-use assets (IFRS 16), and investment property under the cost model (IAS 40). Notably excluded are inventories, deferred tax assets, financial assets, and investment property at fair value.
Practical Trigger Points: When to Test
A critical practical issue is the distinction between annual mandatory testing and indicator-based testing.
Goodwill, indefinite-life intangibles, and intangible assets not yet available for use require annual testing regardless of circumstances. For all other assets, impairment testing is only required when indicators exist.
External Indicators Requiring Attention
The current economic environment makes several external indicators particularly relevant:
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Significant declines in market value beyond normal depreciation
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Increases in market interest rates affecting discount rates
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Adverse technological or regulatory changes
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Situations where market capitalisation falls below net asset value
Internal Indicators Often Overlooked
Physical damage or obsolescence is straightforward, but practitioners should watch for:
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Assets becoming idle earlier than expected
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Restructuring plans affecting asset utilisation
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Internal reports showing worse-than-expected economic performance
The Recoverable Amount Challenge
Recoverable amount is the higher of fair value less costs of disposal (FVLCD) and value in use (VIU). A practical shortcut exists: if either amount exceeds carrying amount, no impairment exists.
Fair Value Less Costs of Disposal
FVLCD follows IFRS 13 requirements. Practitioners must remember to include directly attributable disposal costs such as legal fees, stamp duties, and removal costs. However, only incremental costs should be included.
Value in Use Complexities
VIU calculations present the most practical difficulties. Key requirements:
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Cash flow projections must be based on reasonable assumptions
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Budgets/forecasts limited to maximum five years
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Beyond five years, use steady or declining growth rates
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Exclude financing activities and income tax flows
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Exclude future restructuring or enhancement cash flows
Critical warning: Inflation consistency is essential. Either use nominal cash flows with nominal discount rates, or real cash flows with real rates. Mixing approaches invalidates the calculation.
The discount rate must be pre-tax, reflecting current market assessments of time value and asset-specific risks. Since market rates are typically quoted post-tax, practitioners must perform the pre-tax conversion carefully.
Cash-Generating Units: Where Errors Occur
When individual assets don’t generate independent cash inflows (like a pizza oven in a pizzeria), CGU analysis becomes necessary. The practical challenge is consistency—CGU composition should remain stable across periods.
Goodwill Allocation Complexities
Goodwill must be allocated to CGUs expected to benefit from business combination synergies. Each CGU should:
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Represent the lowest level goodwill is monitored internally
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Not exceed an operating segment per IFRS 8
Corporate Assets: The Allocation Problem
Corporate assets (headquarters, research centres) create significant practical difficulties because they support multiple CGUs. The standard requires:
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Allocate corporate asset portion where reasonably possible
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If impossible, use bottom-up approach testing the smallest CGU group allowing reasonable allocation
Impairment Loss Allocation Order
When a CGU is impaired, allocation follows strict hierarchy:
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Reduce allocated goodwill first
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Reduce other assets pro rata based on carrying amounts
Critical limitation: No asset can be reduced below the highest of its FVLCD, value in use, or zero. This often leaves residual impairment unallocated—a situation requiring careful documentation.
Reversal Restrictions
Reversals require changed estimates—not merely time passage or discount unwinding. The increased carrying amount cannot exceed depreciated historical cost without impairment.
Absolute prohibition: Goodwill impairment reversals are never permitted.
Practical Implementation Issues
From a professional perspective, several areas demand attention:
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Documentation: Assumptions supporting cash flow projections must be reasonable and supportable. Management’s best estimates need clear audit trails.
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Discount rate selection: Using post-tax market rates without pre-tax conversion remains a common error.
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CGU consistency: Period-to-period changes in CGU composition require justification.
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Corporate asset allocation: When reasonable allocation isn’t possible, the bottom-up approach must be meticulously followed.
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Reversal assessment: At each reporting date, the same indicators used for impairment must be reassessed for reversal indicators.
Disclosure Implications
Practitioners must ensure disclosures include impairment losses by asset class, line items affected, events triggering recognition, recoverable amount basis, and discount rates used. For CGUs, key assumptions, growth rates, and discount rates require specific disclosure.
Conclusion
IAS 36 remains fundamentally about ensuring assets aren’t overstated. The practical challenges lie in consistent application—particularly for CGU identification, discount rate determination, and corporate asset allocation. With economic uncertainty affecting asset values globally, robust impairment testing procedures are essential for reliable financial reporting.
Source: IFRS, 19 March 2026