Library / Technical Accounting Manual: IFRS, IAS and Ind AS Equivalents

IAS 36 - Impairment of Assets

Indian equivalent: Ind AS 36 - Impairment of Assets

Objective and scope

IAS 36 ensures a company never carries an asset for more than it can recover - through either using it or selling it. If an asset's book value exceeds its recoverable amount, the difference is written off as an impairment loss.

Core principle

Assets can lose value suddenly - a factory becomes obsolete, a business unit underperforms, a brand fades. IAS 36 forces a reality check: compare book value with recoverable amount (the higher of what you'd get from selling it or from continuing to use it). If book value is higher, book the loss now.

Defined terms and technical terminology

Term

Technical meaning

Impairment

A fall in an asset's value below its carrying amount.

Carrying amount

The value currently shown on the books.

Recoverable amount

The higher of fair value less costs of disposal and value in use.

Value in use (VIU)

The present value of future cash flows expected from continuing to use the asset.

Fair value less costs of disposal

What you'd get selling it today, minus disposal costs.

Cash-Generating Unit (CGU)

The smallest group of assets generating largely independent cash inflows - tested together when a single asset can't be.

Impairment loss

The excess of carrying amount over recoverable amount, charged to profit (or against revaluation surplus first, if any).

Application and worked illustrations

The core test and indicators

At each reporting date, look for indicators of impairment - falling market values, obsolescence, physical damage, adverse legal/market changes, or an internal report showing a unit performing worse than expected. If indicators exist, compute the recoverable amount and compare to the carrying amount. If carrying amount > recoverable amount, recognise an impairment loss. Goodwill and indefinite-life intangibles must be tested annually regardless of indicators.

Worked example 1 - a single asset

A machine has a carrying amount of ₹8,00,000. Newer technology makes it partly obsolete. It could be sold for ₹5,00,000 less ₹20,000 costs = ₹4,80,000, or kept in use generating cash worth ₹5,50,000 today (value in use). Recoverable amount = higher of these = ₹5,50,000. Since ₹8,00,000 > ₹5,50,000, impairment loss = ₹2,50,000.

Journal entry - Recognise the impairment loss

Account

Debit (₹)

Credit (₹)

Impairment loss (P&L)

2,50,000

Accumulated impairment / Asset

2,50,000

Worked example 2 - cash-generating unit and goodwill

A retail chain's single store cannot be tested alone (its assets don't generate cash independently of the fittings, staff, etc.), so the whole store is a CGU. If a CGU carrying ₹1 crore (including ₹20 lakh goodwill) has a recoverable amount of ₹85 lakh, the ₹15 lakh loss is applied first to goodwill (reducing it to ₹5 lakh), then pro-rata to other assets if more remains.

Reversals

If circumstances improve, an impairment loss on most assets can be reversed (up to what the carrying amount would have been without the impairment). But goodwill impairment can NEVER be reversed - once written off, it stays off.

Common mistake: reversing goodwill impairment when performance recovers. This is prohibited.

IND AS LINK

Ind AS 36 is essentially identical to IAS 36 - annual goodwill testing and the ban on reversing goodwill impairment both apply in India.

Further worked illustrations

Extra numeric example - reversing a past impairment

A machine was impaired 2 years ago from ₹8,00,000 down to ₹5,00,000. Conditions improve and its recoverable amount is now ₹7,00,000. But had the impairment never happened, ordinary depreciation would have left it at ₹6,50,000. IAS 36 caps the reversal at that ₹6,50,000 - you cannot restore it above what its depreciated cost would have been. So the reversal is ₹6,50,000 − (current carrying amount), credited to profit.

INDIAN REGULATORY CONTEXT

Indian groups that grew by acquisition carry significant goodwill, which Ind AS 36 requires to be tested for impairment every year, regardless of indicators. A sustained downturn in an acquired business (common test: an IT or pharma subsidiary underperforming forecasts) forces a goodwill write-off that hits consolidated profit - and, once written off, can never be reversed.

TECHNICAL EDGE CASE

A cash-generating unit carrying ₹1,00,00,000 (of which ₹20,00,000 is goodwill, ₹80,00,000 other assets) has a recoverable amount of ₹70,00,000 - a ₹30,00,000 loss. The rule: hit goodwill first (₹20,00,000 → nil), then allocate the remaining ₹10,00,000 pro-rata to the other assets - but no individual asset is written below its own recoverable amount. So if one machine in the unit already has a clear market value, it's protected from taking more than its fair share.

© Vipin Nair. This guide is for reading online only. Copying, downloading, printing and redistribution are not permitted. For study and general reference; not legal, tax or investment advice.