IAS 36 Impairment Testing: Examples, Entries & Mistakes
IFRS explained simply
IAS 36 Impairment Testing: Journal Entries, Examples & Common Mistakes
IAS 36 Impairment of Assets requires an entity to test whether an asset’s carrying amount is recoverable. If the carrying amount is higher than the recoverable amount, the entity recognises an impairment loss. Recoverable amount is the higher of fair value less costs of disposal and value in use. In simple words, IAS 36 stops companies from carrying assets at amounts they cannot recover through sale or future use.
Impairment testing is not just a formula. It is a judgement-heavy process involving cash flow forecasts, discount rates, cash-generating units, goodwill allocation, market evidence and management assumptions.
Direct answer: Under IAS 36, impairment testing compares an asset or cash-generating unit’s carrying amount with its recoverable amount. If carrying amount exceeds recoverable amount, the excess is recognised as an impairment loss in profit or loss unless it relates to a revalued asset.
Preparing for DipIFR? IAS 36 is a high-value standard for impairment, CGU and goodwill questions. Eduyush students can review the ACCA Diploma in IFRS course with Eduyush and practise IFRS topics through structured DipIFR guidance.
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What is IAS 36 impairment testing?
IAS 36 impairment testing is the process of checking whether an asset is carried in the financial statements at more than its recoverable amount. The official standard is issued by the IFRS Foundation. A useful technical summary is also available from Deloitte IAS Plus.
The standard exists because assets can lose economic value before they are sold, scrapped or fully depreciated. A factory may become underused, a brand may lose demand, a software platform may become obsolete, or a subsidiary may miss its forecast. Without impairment testing, financial statements could show assets at amounts that no longer reflect economic reality.
For a broader standards overview, see Eduyush’s IFRS Standards List 2026, which places IAS 36 alongside related standards such as IAS 16, IAS 38, IFRS 3 and IFRS 16.
| IAS 36 concept | Simple meaning | Why it matters |
|---|---|---|
| Carrying amount | The amount at which the asset is shown in the balance sheet. | This is the number being tested. |
| Recoverable amount | The higher of value in use and fair value less costs of disposal. | This represents what the entity can recover from the asset. |
| Impairment loss | The excess of carrying amount over recoverable amount. | This reduces profit and the asset’s carrying value. |
| Cash-generating unit | The smallest group of assets generating largely independent cash inflows. | Used when an individual asset cannot be tested alone. |
| Goodwill impairment | Goodwill is tested through the CGU or group of CGUs to which it belongs. | Goodwill does not generate cash flows independently. |
Practitioner insight: In practice, the calculation is often easier than identifying the correct assumption. The hardest part of IAS 36 is usually not the impairment entry. It is deciding whether management’s cash flows, margins, terminal growth rate and discount rate are supportable.
Recoverable amount under IAS 36
Recoverable amount is the higher of fair value less costs of disposal and value in use. IAS 36 uses the higher amount because the entity is assumed to choose the best recovery route: either sell the asset or continue using it.
| Measure | What it means | Typical evidence | Common challenge |
|---|---|---|---|
| Fair value less costs of disposal | Market-based selling price less direct disposal costs. | Market offers, valuation reports, observable transactions. | Finding reliable market evidence for specialised assets. |
| Value in use | Present value of future cash flows expected from using the asset. | Board-approved budgets, forecasts, discount rate calculations. | Over-optimistic forecasts and unsupported discount rates. |
Value in use in simple words
Value in use asks: “How much are the future cash flows from this asset worth today?” The answer depends on expected cash inflows, expected cash outflows, timing, risk and discount rate.
Common misconception: Students often think impairment testing always requires both value in use and fair value less costs of disposal. IAS 36 requires the recoverable amount, which is the higher of the two. In many cases, if one measure clearly exceeds carrying amount, the entity may not need to calculate the other in detail.
IAS 36 impairment journal entries
The basic impairment journal entry reduces the carrying amount of the asset and records an impairment loss. For most assets measured under the cost model, the impairment loss is recognised in profit or loss.
Dr Impairment loss XXX
Cr Accumulated impairment / Asset XXXThis entry records the loss in the statement of profit or loss and reduces the asset in the statement of financial position. Some entities credit the asset directly; others use an accumulated impairment account. The financial effect is the same.
| Scenario | Debit | Credit | Profit or loss impact |
|---|---|---|---|
| Asset under cost model is impaired | Impairment loss | Asset / accumulated impairment | Expense recognised |
| Revalued asset is impaired | Revaluation surplus first, then impairment loss if excess | Asset | Only excess beyond surplus hits profit or loss |
| Goodwill impairment | Impairment loss | Goodwill | Expense recognised and not reversed later |
| Reversal of impairment, except goodwill | Asset | Reversal of impairment gain | Gain recognised, subject to limits |
Journal entry for impairment reversal
If conditions improve, IAS 36 allows reversal of impairment for assets other than goodwill. The asset cannot be increased above the carrying amount that would have existed if no impairment had been recognised.
Dr Asset XXX
Cr Reversal of impairment loss XXXThis reversal increases the asset and recognises income. However, goodwill impairment cannot be reversed under IAS 36.
IAS 36 impairment testing examples
Example 1: Single asset impairment
A machine has a carrying amount of $500,000. Its fair value less costs of disposal is $430,000. Its value in use is $460,000.
| Item | Amount | IAS 36 treatment |
|---|---|---|
| Carrying amount | $500,000 | Amount currently shown in financial statements |
| Fair value less costs of disposal | $430,000 | Sale route |
| Value in use | $460,000 | Use route |
| Recoverable amount | $460,000 | Higher of $430,000 and $460,000 |
| Impairment loss | $40,000 | $500,000 less $460,000 |
Dr Impairment loss $40,000
Cr Machine / accumulated impairment $40,000Example 2: No impairment even when market value falls
A delivery vehicle has a carrying amount of $80,000. Its market selling price after disposal costs is $65,000, but its value in use is $88,000 because it is essential to profitable delivery contracts.
There is no impairment because the recoverable amount is $88,000, which exceeds the carrying amount of $80,000. This is where students often get trapped. A fall in market value is an impairment indicator, not automatically an impairment loss.
Mini case study: Manufacturing plant
A manufacturing company operates an older plant. Demand has fallen, energy costs have risen, and production volumes are below capacity. The plant’s carrying amount is high because of recent capital expenditure. Management argues that demand will recover, but sales teams have no signed contracts supporting the forecast.
Under IAS 36, the impairment test must be based on reasonable and supportable assumptions. Auditors will challenge whether forecast volumes, selling prices and cost savings are realistic. The accounting answer depends on judgement, not just formulas.
Mini case study: SaaS platform
A SaaS company capitalised development costs for a product module. A competitor launches a better feature, customers stop renewing, and management decides not to invest further. Even if the software is not yet abandoned, IAS 36 impairment indicators exist. The finance team must test whether the capitalised asset can still recover its carrying amount through future cash flows.
Cash-generating units and goodwill under IAS 36
A cash-generating unit, or CGU, is the smallest identifiable group of assets that generates cash inflows largely independent from other assets. CGUs matter because many assets do not generate cash flows on their own. A hotel building, brand, equipment and booking system may work together to generate income.
For a deeper Eduyush explanation of CGU boundaries and examples, see IAS 36 CGU impairment examples.
| Question | Single asset test | CGU test |
|---|---|---|
| When used? | When the asset generates independent cash inflows. | When cash flows depend on a group of assets. |
| Example | Investment property leased independently. | Factory, retail store, airline route, hotel unit. |
| Main difficulty | Estimating recoverable amount for one asset. | Defining the correct boundary of the CGU. |
| Goodwill relevance | Usually not tested alone. | Goodwill is allocated to CGUs or groups of CGUs. |
Goodwill impairment
Goodwill acquired in a business combination must be tested for impairment annually and whenever there is an impairment indicator. Goodwill is tested at the CGU level because it does not generate independent cash flows.
What auditors focus on: Auditors usually challenge goodwill impairment models because they rely heavily on management forecasts. Small changes in discount rate, terminal growth rate or margin assumptions can change the result from “no impairment” to a material impairment loss.
Mini case study: Retail store CGU
A retail group treats each store as a CGU because each store generates largely independent cash inflows. One store has declining footfall, repeated losses and rising lease costs. The assets allocated to the store include fixtures, right-of-use assets and working capital. IAS 36 requires the store-level CGU to be tested for impairment if indicators exist.
Common IAS 36 mistakes
IAS 36 errors usually arise because teams treat impairment testing as a spreadsheet exercise instead of a business judgement. The standard is technical, but the real risk sits in assumptions, evidence and consistency.
| Common mistake | Why it is wrong | Better approach |
|---|---|---|
| Ignoring impairment indicators | Testing may be required before year-end if indicators exist. | Build a quarterly impairment indicator checklist. |
| Using unrealistic cash flows | Value in use must be based on reasonable and supportable assumptions. | Tie forecasts to budgets, contracts and external evidence. |
| Mixing pre-tax and post-tax assumptions | IAS 36 value in use requires consistency between cash flows and discount rate. | Review the model mechanics carefully. |
| Defining CGUs too broadly | A larger CGU can hide impairment in a weaker unit. | Use the smallest group generating independent cash inflows. |
| Reversing goodwill impairment | IAS 36 prohibits reversal of goodwill impairment. | Track goodwill impairment separately. |
| Forgetting disclosure | Material impairment assumptions require transparent disclosure. | Prepare disclosure support alongside the model. |
Practitioner insight: Many students memorise the impairment journal entry but miss the business logic. IAS 36 is not asking “has the asset fallen in value?” It is asking “can the entity recover the carrying amount through use or sale?”
What actually goes wrong in practice
In real companies, impairment testing often fails because the necessary information sits outside finance. Sales owns forecasts, operations owns capacity data, treasury owns discount rate inputs, legal owns contract terms, and strategy owns business plans. Finance then receives the pieces late and has to convert them into an IFRS-compliant model.
| Practical issue | Where it comes from | Financial reporting risk |
|---|---|---|
| Forecasts are too optimistic | Commercial teams | Impairment loss understated |
| CGU boundaries are unclear | Operations and management reporting | Impairment hidden by profitable units |
| Discount rate unsupported | Treasury or external valuation | Recoverable amount misstated |
| Right-of-use assets missed | Lease accounting team | CGU carrying amount incomplete |
| Tax and accounting forecasts mixed | Tax and finance teams | Inconsistent value in use model |
Practical control finance teams should build
A strong IAS 36 control should include impairment indicator assessment, CGU mapping, reconciliation of carrying amounts, approval of cash flow forecasts, discount rate review, sensitivity analysis and disclosure review. This control should happen before the audit starts, not when auditors ask for the impairment file.
Financial statement impact of IAS 36 impairment
An impairment loss affects both performance and financial position. It reduces assets and usually reduces profit. It may also affect ratios, debt covenants, management bonuses and investor perception.
| Financial statement area | Impact of impairment | Why users care |
|---|---|---|
| Statement of profit or loss | Impairment loss reduces profit. | Analysts may treat it as non-recurring or evidence of poor investment decisions. |
| Statement of financial position | Asset carrying amount decreases. | Net assets and equity may fall. |
| Cash flow statement | Impairment is non-cash but affects profit. | It is usually adjusted in operating cash flow reconciliation. |
| Ratios | ROA, gearing and asset turnover may change. | Covenants and valuation metrics can be affected. |
| Disclosures | Key assumptions and sensitivities may need disclosure. | Users need to understand judgement and estimation uncertainty. |
Why IAS 36 matters for India, GCC and MNC finance teams
IAS 36 is especially important for Indian finance professionals, GCC shared service centres and MNC reporting teams because impairment models often sit at the intersection of local data and group reporting requirements.
| Reader type | Why IAS 36 matters |
|---|---|
| DipIFR student | IAS 36 is frequently tested through calculations, CGUs, goodwill and written explanations. |
| Indian finance professional | Ind AS impairment requirements are closely aligned with IFRS principles, making IAS 36 knowledge practically useful. |
| GCC shared service team | Regional finance teams often prepare impairment packs for group reporting. |
| MNC reporting team | Group consolidation requires consistent impairment assumptions across entities. |
| Auditor | Impairment involves significant judgement, estimates and management bias risk. |
| CFO/controller | Impairment can affect profit, covenants, investor communication and strategic decisions. |
If you are preparing for DipIFR, you may also find Eduyush’s ACCA Diploma in IFRS course page, IFRS training collection and DipIFR classes timetable useful for planning your study.
You can also read Eduyush’s how to pass ACCA DipIFR guide and the IFRS interview questions guide if you want to connect IAS 36 with exam and career preparation.
How AI tools can get IAS 36 wrong
AI tools can simplify IAS 36 concepts, summarise examples and help students practise impairment calculations. But they can also make mistakes if the question requires judgement, updated standard knowledge, entity-specific facts or careful interpretation of assumptions.
| AI risk | IAS 36 example | Human check needed |
|---|---|---|
| Assumption error | Accepting management’s growth rate without challenge. | Compare with market data and historical performance. |
| Judgement error | Choosing the wrong CGU boundary. | Understand how cash inflows are generated. |
| Formula error | Using the lower instead of higher recoverable amount measure. | Check IAS 36 definitions carefully. |
| Accounting vs tax confusion | Mixing tax cash flows into an accounting value in use model. | Keep model inputs internally consistent. |
The balanced view is simple: AI can help you learn IAS 36 faster, but it should not replace professional judgement. Impairment testing depends on facts, forecasts and evidence.
Build IAS 36 confidence for DipIFR and IFRS reporting
IAS 36 becomes easier when you connect the accounting entry with the business story behind the impairment. If you are preparing for DipIFR, Eduyush’s ACCA Diploma in IFRS course can help you practise exam-style questions, understand IFRS logic and avoid common mistakes in standards such as IAS 36, IAS 12, IFRS 16 and IFRS 3.
FAQs on IAS 36 impairment testing
What is IAS 36 in simple words?
IAS 36 is the IFRS standard that ensures assets are not shown above the amount recoverable through sale or use. If carrying amount exceeds recoverable amount, an impairment loss is recognised.
What is the journal entry for impairment under IAS 36?
The basic entry is: debit impairment loss and credit the asset or accumulated impairment. This records an expense and reduces the asset’s carrying amount.
What is recoverable amount under IAS 36?
Recoverable amount is the higher of fair value less costs of disposal and value in use.
Can impairment be reversed under IAS 36?
Yes, impairment can be reversed for assets other than goodwill, subject to limits. Goodwill impairment cannot be reversed.
Why do students get IAS 36 wrong?
Students often memorise the impairment formula but misunderstand recoverable amount, CGU boundaries, goodwill impairment and reversal rules.
How is IAS 36 tested in DipIFR?
DipIFR questions may test impairment calculations, CGU allocation, goodwill impairment, journal entries and written explanations of assumptions.
Why do auditors focus on impairment testing?
Auditors focus on IAS 36 because impairment models involve significant estimates, management judgement and potential bias in forecasts and discount rates.
Can AI tools explain IAS 36 correctly?
AI tools can explain the basics, but they may get entity-specific assumptions, CGU identification, updated requirements or judgement-heavy scenarios wrong.
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