Impairment of Assets (IND AS 36), Objectives, Scope, Recognition, Measurement, Disclosures, Example

Ind AS 36 prescribes the procedures an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset, in which case the asset is impaired and the standard requires recognition of an impairment loss. The standard also specifies when an entity should reverse an impairment loss and prescribes disclosures required. It applies to most assets, though certain assets such as inventories, financial assets, and deferred tax assets, already covered by other standards, are excluded from its scope.

Objectives of Impairment of Assets (IND AS 36):

1. Ensuring Assets Are Not Carried Above Recoverable Amount

The primary objective of Ind AS 36 is to prescribe procedures that an entity applies to ensure its assets are carried at no more than their recoverable amount. This objective embodies the prudence principle, preventing entities from reporting assets on the balance sheet at values exceeding the genuine economic benefit expected to be recovered through their continued use or eventual sale. By establishing systematic impairment testing procedures, the standard protects users of financial statements from being misled by overstated asset values that no longer reflect true underlying economic worth, particularly during periods of adverse business conditions.

2. Defining Recoverable Amount and Establishing Testing Triggers

Ind AS 36 aims to define recoverable amount as the higher of an asset’s fair value less costs of disposal and its value in use, and to establish clear indicators and circumstances that trigger impairment testing. This objective ensures entities do not perform impairment assessments arbitrarily but instead respond systematically to internal and external indicators—such as significant declines in market value, adverse changes in the technological, market, or economic environment, or evidence of obsolescence—thereby ensuring impairment losses are identified and recognised in a timely manner rather than being deferred or overlooked during financial statement preparation.

3. Prescribing Recognition of Impairment Losses

A key objective of the standard is to prescribe when and how impairment losses should be recognised, requiring that when an asset’s carrying amount exceeds its recoverable amount, the asset is impaired, and the entity must reduce the carrying amount to recoverable amount, recognising the difference as an impairment loss in profit or loss (unless the asset is carried at revalued amount). This objective ensures consistent, timely recognition of value diminution across all reporting entities, preventing understatement of losses and ensuring financial statements faithfully represent the current economic condition of an entity’s asset base.

4. Facilitating Identification of Cash-Generating Units

Ind AS 36 seeks to provide guidance for identifying the cash-generating unit to which an asset belongs when an individual asset’s recoverable amount cannot be estimated because it does not generate cash inflows independently of other assets. This objective ensures a consistent, rational approach to grouping assets for impairment testing purposes, particularly relevant for goodwill and assets integrated within larger operational units. By establishing clear principles for identifying cash-generating units, the standard prevents inconsistent or arbitrary grouping practices that could otherwise obscure genuine impairment or artificially mask losses within a broader unit.

5. Prescribing Reversal of Impairment Losses

The standard aims to specify circumstances under which a previously recognised impairment loss should be reversed, requiring reversal when there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. This objective ensures that if conditions causing an earlier impairment no longer exist or have improved, the earlier conservative write-down is appropriately corrected, restoring the asset’s carrying amount up to what it would have been had no impairment occurred, net of depreciation, though goodwill impairment losses are never permitted to be reversed under this standard.

6. Prescribing Disclosures for Impairment and Reversals

Ind AS 36 seeks to prescribe comprehensive disclosures relating to impaired assets, enabling users of financial statements to understand the key assumptions used in determining recoverable amounts, the events and circumstances leading to recognition or reversal of impairment losses, and the amounts involved for each class of assets and reportable segments. This objective ensures transparency around impairment judgments, which often involve significant management estimation and discretion, allowing users to critically evaluate the reasonableness of impairment-related figures and assess the potential impact of changes in key assumptions on the entity’s reported financial position and performance.

Scope of Impairment of Assets (IND AS 36):

1. General Applicability to Most Assets

Ind AS 36 applies in accounting for the impairment of most assets, requiring entities to test assets for impairment whenever indicators of impairment exist, and in certain cases, at least annually regardless of indicators. It broadly covers assets such as property, plant and equipment, intangible assets, goodwill, investment property carried at cost, and investments in subsidiaries, associates, and joint ventures. This wide applicability ensures that the vast majority of an entity’s non-current, non-financial assets are subject to systematic impairment review, safeguarding against overstatement of asset values across virtually all major categories of long-term operating and investment assets.

2. Exclusion – Inventories

Ind AS 36 does not apply to inventories, since these are already governed by Ind AS 2, which requires inventories to be measured at the lower of cost and net realisable value. Since Ind AS 2 inherently incorporates a mechanism for writing down inventory values when their utility declines below cost, a separate impairment testing regime under Ind AS 36 would be redundant and potentially conflicting. This exclusion ensures inventories continue to follow their own specific, well-established valuation framework rather than being subjected to the broader recoverable amount concept applicable to other long-term assets.

3. Exclusion – Assets Arising from Construction Contracts

Assets arising from construction contracts are excluded from the scope of Ind AS 36, as their recognition and measurement now fall under Ind AS 115 (Revenue from Contracts with Customers), which governs contract assets arising from long-term construction and service arrangements. Since Ind AS 115 provides its own specific mechanism for recognising and measuring contract-related assets based on progress toward completion and expected consideration, applying the general impairment framework of Ind AS 36 would be inconsistent with the specialised revenue-based measurement principles already governing such assets under the relevant revenue recognition standard.

4. Exclusion – Deferred Tax Assets

Deferred tax assets are excluded from the scope of Ind AS 36, since their recognition and measurement are separately governed by Ind AS 12 (Income Taxes). Ind AS 12 already incorporates its own recognition criteria, requiring deferred tax assets to be recognised only to the extent it is probable that future taxable profit will be available against which the deductible temporary differences can be utilised. This built-in recoverability assessment under Ind AS 12 makes a separate impairment test under Ind AS 36 unnecessary and potentially duplicative for this specific category of asset.

5. Exclusion – Assets Arising from Employee Benefits

Assets arising from employee benefits, such as those relating to defined benefit plan surpluses, are excluded from the scope of Ind AS 36, since these are governed by Ind AS 19 (Employee Benefits). Ind AS 19 contains its own specific measurement principles, including the asset ceiling test, which limits recognition of any net defined benefit asset to the present value of economic benefits available in the form of refunds or reductions in future contributions. This specialised mechanism renders separate impairment testing under Ind AS 36 unnecessary for employee benefit-related assets.

6. Exclusion – Financial Assets within Scope of Ind AS 109

Financial assets falling within the scope of Ind AS 109 (Financial Instruments) are excluded from Ind AS 36, since impairment of such assets is governed by the expected credit loss model prescribed under Ind AS 109 itself. This specialised model requires forward-looking assessment of credit risk and expected losses over the life of financial instruments such as loans, receivables, and debt investments, which differs fundamentally from the recoverable amount approach used for non-financial assets. This exclusion ensures financial assets follow a measurement framework tailored specifically to credit risk considerations rather than physical or intangible asset impairment.

7. Exclusion – Investment Property Measured at Fair Value

Investment property measured at fair value in accordance with Ind AS 40 is excluded from the scope of Ind AS 36, since fair value measurement under Ind AS 40 already reflects current market conditions and inherently captures any decline in value through periodic fair value remeasurement recognised in profit or loss. Applying a separate impairment test would be redundant, as the fair value model continuously adjusts the carrying amount to reflect market-based recoverable value. However, investment property measured under the cost model remains within the scope of Ind AS 36 and is subject to its impairment testing requirements.

8. Exclusion – Biological Assets and Non-Current Assets Held for Sale

Biological assets related to agricultural activity, measured at fair value less costs to sell under Ind AS 41, are excluded from Ind AS 36, since fair value measurement already incorporates market-based value changes. Similarly, non-current assets (or disposal groups) classified as held for sale under Ind AS 105 are excluded, as these are measured at the lower of carrying amount and fair value less costs to sell under that standard’s specific provisions. Both exclusions avoid duplicative or conflicting measurement approaches, ensuring each asset category follows the single most appropriate standard governing its particular valuation circumstances.

Recognition of Impairment of Assets (IND AS 36):

1. Recognition of an Impairment Loss

An impairment loss is recognised whenever the recoverable amount of an asset is less than its carrying amount, with the carrying amount reduced to recoverable amount. This reduction is recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another standard (such as Ind AS 16), in which case the impairment loss is treated as a revaluation decrease under that standard. This recognition ensures that any diminution in an asset’s economic value, once identified through impairment testing, is transparently reflected in the entity’s financial statements without delay, upholding faithful representation.

2. Recognition Following Impairment Indicators

An entity is required to recognise an impairment loss only after assessing, at the end of each reporting period, whether there is any indication that an asset may be impaired, considering both external sources (such as significant declines in market value, adverse changes in technology, markets, or the economy) and internal sources (such as evidence of obsolescence, physical damage, or worse-than-expected economic performance). If any such indication exists, the entity must estimate the asset’s recoverable amount and recognise an impairment loss accordingly, ensuring impairment recognition is triggered by objective evidence rather than arbitrary or discretionary management judgment.

3. Mandatory Annual Testing Regardless of Indicators

Certain assets require impairment testing at least annually, irrespective of whether any indication of impairment exists, given their inherent susceptibility to value fluctuation or difficulty in reliable annual valuation. These include intangible assets with indefinite useful lives, intangible assets not yet available for use, and goodwill acquired in a business combination. This recognition requirement ensures that assets particularly prone to overstatement, or those lacking a systematic amortisation charge to naturally reduce carrying value over time, are subject to rigorous, mandatory scrutiny each year rather than relying solely on the general indicator-based assessment applicable to other assets.

4. Recognition of Impairment Loss for a Cash-Generating Unit

When an impairment loss is recognised for a cash-generating unit, it is allocated first to reduce the carrying amount of any goodwill allocated to that unit, and then to the other assets of the unit on a pro-rata basis based on the carrying amount of each asset, subject to certain limits. No individual asset within the unit is reduced below the highest of its fair value less costs of disposal, its value in use (if determinable), and zero. This recognition sequencing ensures goodwill, being the least identifiable and most residual asset, absorbs impairment losses before more tangible, specifically identifiable assets.

5. Recognition of Impairment Loss for Goodwill

Goodwill acquired in a business combination is, for impairment testing purposes, allocated to each of the acquirer’s cash-generating units expected to benefit from the synergies of the combination, and tested for impairment as part of that unit at least annually. If the recoverable amount of the cash-generating unit (including goodwill) is less than its carrying amount, an impairment loss is recognised, first reducing goodwill’s carrying amount. Since goodwill does not generate independent cash flows and cannot be tested in isolation, its impairment is inherently linked to the performance of the broader cash-generating unit to which it relates.

6. Non–Reversal of Impairment Loss for Goodwill

An impairment loss recognised for goodwill is never reversed in a subsequent period, regardless of any improvement in the recoverable amount of the cash-generating unit to which the goodwill relates. This restriction exists because increases in recoverable amount subsequent to recognition of an impairment loss for goodwill are more likely to reflect an increase in internally generated goodwill, rather than a genuine reversal of the impairment recognised on the originally acquired goodwill. This recognition rule prevents entities from artificially inflating reported goodwill through recognition of internally generated value that does not qualify for balance sheet recognition under Ind AS 38.

Measurement of Impairment of Assets (IND AS 36):

1. Measuring Recoverable Amount

The recoverable amount of an asset or cash-generating unit is measured as the higher of its fair value less costs of disposal and its value in use. If either amount exceeds the asset’s carrying amount, the asset is not impaired and it is unnecessary to calculate the other amount. This “higher of” approach reflects the rational economic choice available to the entity either selling the asset to realise fair value less disposal costs, or continuing to use it to generate value in use ensuring recoverable amount always represents the more advantageous of these two realistic recovery avenues available to management.

2. Measurement of Fair Value Less Costs of Disposal

Fair value less costs of disposal is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date, less the incremental costs directly attributable to the disposal of the asset. Costs of disposal include legal costs, stamp duty, costs of removing the asset, and direct incremental costs to bring the asset into condition for sale, but exclude finance costs and income tax expense. Where an active market or binding sale agreement exists, these provide the most reliable basis; otherwise, estimation techniques based on comparable market transactions are used.

3. Measurement of Value in Use

Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit, calculated by estimating future cash inflows and outflows from continuing use and ultimate disposal, and applying an appropriate discount rate to those future cash flows. This measurement reflects estimates of future cash flows, expectations about possible variations in amount or timing, the time value of money, the price for bearing uncertainty inherent in the asset, and other factors market participants would consider. It captures the asset’s worth specifically to the entity through continued operational use rather than sale.

4. Elements Reflected in Value in Use Calculations

Cash flow projections used in measuring value in use should be based on reasonable and supportable assumptions, reflecting management’s best estimate of economic conditions over the remaining useful life of the asset, with greater weight given to external evidence. Projections should be based on the most recent financial budgets or forecasts approved by management, typically covering a maximum period of five years, unless a longer period can be justified, with extrapolation beyond this using a steady or declining growth rate. Cash flows must exclude financing activities and income tax receipts or payments, focusing purely on pre-tax operating cash flows.

5. Discount Rate Used in Value in Use

The discount rate applied in calculating value in use must be a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset for which future cash flow estimates have not been adjusted. This rate should not reflect risks for which future cash flow estimates have already been adjusted, avoiding double-counting of risk. Entities typically start with the entity’s weighted average cost of capital, incremental borrowing rate, or other market borrowing rates, adjusting to reflect the specific risks associated with the particular asset or cash-generating unit under review.

6. Measurement of Recoverable Amount for Cash-Generating Units

When it is not possible to estimate the recoverable amount of an individual asset because it does not generate cash inflows largely independent of other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows largely independent of cash inflows from other assets or groups of assets. This measurement approach ensures impairment testing remains meaningful even for assets that only contribute to value generation collectively, such as individual machines within an integrated production line.

7. Measurement and Allocation of Corporate Assets

Corporate assets, such as head office buildings or a research centre, do not generate independent cash inflows and their carrying amount cannot be fully attributed to a single cash-generating unit. For impairment testing, such assets are identified, and if a reasonable and consistent basis of allocation exists, they are allocated to cash-generating units on that basis; otherwise, the smallest group of cash-generating units to which a reasonable allocation basis can be identified is tested by comparing its carrying amount (including the allocated corporate asset) with its recoverable amount, ensuring corporate assets are not excluded from impairment assessment entirely.

8. Measurement of Reversal of Impairment Loss

When measuring the reversal of a previously recognised impairment loss for an asset other than goodwill, the increased carrying amount attributable to the reversal must not exceed the carrying amount that would have been determined (net of depreciation or amortisation) had no impairment loss been recognised in prior years. This measurement ceiling ensures the reversal does not effectively create a revaluation above historical cost-based carrying value, maintaining consistency with the cost model’s inherent limits. The reversal is recognised immediately in profit or loss, unless the asset is carried at revalued amount, in which case it is treated as a revaluation increase.

Disclosures of Impairment of Assets (IND AS 36):

1. Impairment Losses and Reversals Recognised During the Period

For each class of assets, the financial statements must disclose the amount of impairment losses recognised in profit or loss during the period and the line item(s) in which those losses are included, along with the amount of any reversals of impairment losses recognised in profit or loss and the corresponding line item(s). This disclosure enables users to identify the magnitude and location of impairment-related charges and reversals within the statement of profit and loss, distinguishing these from ordinary operating costs and supporting clearer assessment of underlying, sustainable operating performance separate from asset value adjustments.

2. Impairment Losses and Reversals Recognised in Other Comprehensive Income

The entity must disclose the amount of impairment losses on revalued assets recognised in other comprehensive income during the period, and the amount of any reversals of impairment losses on revalued assets recognised in other comprehensive income. Since impairment losses and reversals on revalued assets bypass profit or loss and are instead recognised directly against the revaluation surplus in equity, this separate disclosure ensures users are not misled into overlooking impairment-related movements that do not appear within the statement of profit and loss but nonetheless materially affect the entity’s reported equity and comprehensive income for the period.

3. Disclosures by Class of Assets

For each class of assets, an entity must disclose the events and circumstances that led to the recognition or reversal of the impairment loss. This qualitative disclosure provides users with context beyond the mere quantitative impact, helping them understand whether the impairment arose from external market factors, internal operational issues, technological obsolescence, or other specific circumstances. Such narrative explanation is essential for users seeking to assess whether the underlying causes of impairment are likely to persist, recur, or reverse in future periods, thereby supporting more informed evaluation of the entity’s future earnings potential and asset quality.

4. Disclosures for Individual Material Impairment Losses

For an individual asset (including goodwill) or a cash-generating unit for which an impairment loss has been recognised or reversed during the period, and which is material to the financial statements as a whole, an entity must disclose the events and circumstances leading to the loss or reversal, the amount involved, the nature of the asset (or, for a cash-generating unit, a description of the unit), and the reportable segment to which it belongs. This granular, item-specific disclosure ensures particularly significant impairment events receive appropriately detailed transparency rather than being aggregated and obscured within broader class-level totals.

5. Basis for Determining Recoverable Amount

For material individual impairment losses or reversals, an entity must disclose whether recoverable amount is fair value less costs of disposal or value in use, and if fair value less costs of disposal, the level of the fair value hierarchy (as per Ind AS 113) used, the valuation technique applied, and key assumptions used in measuring fair value. If value in use is used, the discount rate applied in the current and previous estimate (if relevant) must be disclosed. This disclosure allows users to assess the reliability and reasonableness of the methodology and assumptions underlying reported impairment figures.

6. Aggregate Disclosures When Individual Items Are Not Material

When impairment losses recognised (or reversed) during the period are individually not material but are significant in aggregate to the financial statements as a whole, an entity must disclose the main classes of assets affected and the main events and circumstances leading to recognition of these impairment losses and reversals. This aggregate-level disclosure ensures that collectively significant impairment activity is not entirely omitted from financial statements merely because no single item individually crosses the materiality threshold, preserving overall transparency regarding the cumulative impact of asset value declines across the entity’s operations during the reporting period.

7. Key Assumptions Used in Estimating Recoverable Amounts

For each cash-generating unit (or group of units) for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to it is significant in comparison with the entity’s total carrying amount of such assets, disclosures include the carrying amount of goodwill and indefinite-life intangibles allocated, the basis on which recoverable amount has been determined (value in use or fair value less costs of disposal), key assumptions used in cash flow projections (such as growth rates and discount rates), and a description of management’s approach to determining values assigned to each key assumption.

8. Sensitivity Analysis Disclosures

Where a reasonably possible change in a key assumption used to determine recoverable amount would cause the carrying amount of a cash-generating unit to exceed its recoverable amount, an entity must disclose the amount by which recoverable amount exceeds carrying amount, the value assigned to the key assumption, and the amount by which that value must change (after incorporating any consequential effects) for recoverable amount to equal carrying amount. This sensitivity disclosure is critical for alerting users to cash-generating units operating close to impairment thresholds, where relatively modest changes in key assumptions could trigger significant future impairment charges.

Example of Impairment of Assets (IND AS 36):

A company has a machine with a carrying amount of ₹10,00,000. Due to technological changes, the company estimates its fair value less costs of disposal at ₹7,50,000 and value in use at ₹8,00,000.

Under Ind AS 36, the recoverable amount is the higher of fair value less costs of disposal and value in use.

Calculation:

Recoverable Amount = Higher of ₹7,50,000 and ₹8,00,000 = ₹8,00,000

Impairment Loss = ₹10,00,000 − ₹8,00,000 = ₹2,00,000

Journal Entry

Therefore, the machine will be shown in the Balance Sheet at its revised carrying amount of ₹8,00,000.