Ind AS 36 Impairment of Assets — Everything CA Students Must Know
Imagine you bought a machine for ₹10 lakh. Two years later, the product it makes is no longer in demand. The machine still sits in your books at ₹8 lakh (after depreciation), but realistically, would anyone pay that much for it today? Probably not. This gap between what is shown on the balance sheet and what the asset is truly worth is exactly what Ind AS 36 – Impairment of Assets is designed to fix.
Let us walk through the standard the way a teacher would — step by step, with clear logic.
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What Is Impairment?
An asset is said to be impaired when its carrying amount (the book value) exceeds its recoverable amount. The impairment loss is simply:
> Impairment Loss = Carrying Amount − Recoverable Amount
This loss is charged to the Profit & Loss account immediately (unless the asset was previously revalued, in which case it first reduces the revaluation surplus).
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Step 1 — Spotting the Indicators
Ind AS 36 does not ask you to test every asset every year. Instead, at each reporting date, you assess whether there are indicators of impairment. Think of these as warning signals.
External Indicators
- The asset's market value has fallen significantly more than normal wear and tear.
- Major adverse changes in the technological, economic, legal or market environment.
- Market interest rates have risen, making the discount rate higher and future cash flows less valuable.
- The carrying amount of net assets is greater than the company's market capitalisation.
Internal Indicators
- Evidence of physical damage or obsolescence.
- The asset is idle, or plans exist to discontinue or restructure the operation using it.
- Internal reports show economic performance of the asset is worse than expected.
Important exception: Goodwill and certain intangible assets (those with indefinite useful life or not yet available for use) must be tested for impairment every year, regardless of whether indicators exist.
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Step 2 — Calculating the Recoverable Amount
Once an indicator is spotted, you calculate the recoverable amount, which is the higher of:
- Fair Value Less Costs of Disposal (FVLCD) — what you would receive by selling the asset in an arm's-length transaction, minus selling costs.
- Value in Use (VIU) — the present value of future cash flows the asset is expected to generate, including any residual value at the end of its useful life.
You do not need to calculate both every time. If either one already exceeds the carrying amount, the asset is not impaired — you can stop there.
Understanding Value in Use
VIU involves two components:
- Cash flow projections — based on reasonable assumptions, typically management-approved budgets covering a maximum of five years (longer periods need justification).
- Discount rate — a pre-tax rate reflecting current market assessments of the time value of money and risks specific to the asset. Do not use the company's borrowing rate blindly; it must be asset-specific.
A practical tip: growth rates used beyond the five-year budget period should not exceed the long-term average growth rate for the industry or country — verify exact guidance in the latest ICAI study material.
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Step 3 — Cash Generating Units (CGUs)
Many assets do not generate cash flows independently. Your machine may work together with ten other machines on a production line. In such cases, you test the Cash Generating Unit (CGU) — the smallest identifiable group of assets that generates cash inflows largely independent of other assets.
- Goodwill is allocated to CGUs or groups of CGUs that benefit from the synergies of the acquisition.
- When a CGU is impaired, the impairment loss is allocated: first to goodwill, then pro-rata to other assets (but no asset is reduced below its own FVLCD or VIU, whichever is higher).
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Step 4 — Reversals of Impairment
Good news can happen too. If conditions improve, you may reverse an impairment loss — but with important limits:
- The reversal increases the carrying amount, but not beyond what the depreciated historical cost would have been had no impairment been recognised.
- Reversal is recognised in P&L (or in OCI if the asset is carried at revalued amount).
- Goodwill impairment can never be reversed. This is a strict rule. Once written down, goodwill stays written down.
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Quick Logic Summary
| Step | Action | |------|--------| | 1 | Check indicators at each reporting date | | 2 | Calculate recoverable amount (higher of FVLCD and VIU) | | 3 | Compare with carrying amount | | 4 | Recognise impairment loss if carrying amount > recoverable amount | | 5 | Reassess in future years; reverse if conditions improve (except goodwill) |
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Common Exam Mistakes to Avoid
- Confusing FVLCD with just fair value — always deduct disposal costs.
- Forgetting that the discount rate for VIU is pre-tax.
- Applying goodwill reversal rules — remember, goodwill reversal is prohibited.
- Not allocating impairment loss to goodwill first within a CGU.
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FAQs
Q1. Can impairment testing be skipped if the asset's market value has gone up? Yes. If there is a clear indication that recoverable amount exceeds carrying amount, you need not do a formal calculation. But for goodwill and certain intangibles, annual testing is mandatory regardless.
Q2. What discount rate should I use for Value in Use? Use a pre-tax rate that reflects current market assessments of the time value of money and risks specific to the asset. In practice, a Weighted Average Cost of Capital (WACC) is often used as a starting point and then adjusted — verify the exact methodology in the latest ICAI study material.
Q3. If two assets are in the same CGU and both impaired, how is the loss split? After writing down any goodwill first, the remaining impairment loss is allocated to other assets on a pro-rata basis according to their carrying amounts, subject to the floor of each asset's individual recoverable amount.
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Ind AS 36 rewards students who understand the logic behind it — why impairment exists, how recoverable amount protects users of financial statements, and where reversals are allowed. Build that understanding first, then the numbers will follow naturally.
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