Asset values change. Markets shift, business conditions deteriorate and acquisitions don't always deliver the synergies expected. When that happens, your balance sheet needs to reflect reality, not historical cost. That's the core purpose of IAS 36, and for finance teams responsible for group reporting, getting it right is non-negotiable.
What is IAS 36 and why does it matter for financial consolidation?
IAS 36 Impairment of Assets requires that assets are never carried at more than their recoverable amount – that is, the higher of fair value less costs of disposal and value in use. When the carrying amount exceeds the recoverable amount, an impairment loss must be recognized immediately in the profit and loss statement.
For financial consolidation, the implications extend across the entire group. Impairment losses recognized at subsidiary level must flow through to the consolidated financial statements, affecting group-level asset values and equity. That means inconsistencies in how individual entities apply the standard can compromise the integrity of your consolidated reporting.
Understanding the recoverable amount
Before running the impairment test, you need to understand what you're measuring.
The recoverable amount has two components:
- Fair value less costs of disposal: The price you'd receive in an orderly market transaction, minus direct selling costs such as legal fees, transaction taxes and removal costs. Where no active market exists, IFRS 13 valuation methods apply.
- Value in use: The present value of future cash flows expected from the asset, calculated using a discounted cash flow (DCF) analysis. IAS 36 requires detailed projections for up to five years, with a terminal value applied beyond that period using a constant or declining growth rate.
You don't always need to calculate both. If either amount already exceeds the carrying value, the asset isn't impaired.
The four-step impairment process
IAS 36 sets out a clear sequence for determining and recording impairment:
Step 1: Identify indications of impairment. At each balance sheet date, assess whether trigger events exist. These include a decline in market value, adverse changes in the operating environment, rising discount rates or internal indicators such as physical damage or worse-than-expected economic performance.
Step 2: Establish whether impairment exists. Compare the carrying amount to the recoverable amount. If the carrying amount is higher, impairment exists.
Step 3: Determine the impairment amount. The difference between carrying amount and recoverable amount is the impairment loss.
Step 4: Record the impairment in the balance sheet and P&L. Reduce the carrying amount immediately and adjust future depreciation schedules to reflect the new value distributed across the remaining useful life.
Special rules for goodwill
Goodwill requires separate treatment under IAS 36, and it's where the complexity increases significantly.
Unlike other assets, goodwill can't be tested in isolation. It must be allocated to cash-generating units (CGUs), the smallest identifiable group of assets that generates largely independent cash inflows. Each CGU must represent at least the lowest level at which goodwill is monitored internally and can't exceed an operating segment.
Goodwill follows an impairment-only approach: no scheduled amortization, but mandatory annual testing regardless of whether trigger events exist or not. When a CGU is impaired, goodwill is written down first. Only then are the carrying amounts of other non-current assets in the CGU reduced proportionately.
One further rule worth noting: once goodwill is impaired, the loss can never be reversed. For all other assets, reversal is required if the recoverable amount subsequently increases, but there's a ceiling. The written-up carrying amount can't exceed what it would have been had the original impairment never occurred.
What assets fall under IAS 36?
Beyond goodwill, IAS 36 applies to:
- Other non-current intangible assets, including those with indefinite useful lives (which also require annual testing)
- Property, plant and equipment
- Investment property measured at amortized cost
- Joint ventures and associates accounted for under the equity method
- Right-of-use assets under IFRS 16
Assets outside this scope, such as financial instruments under IFRS 9 and inventories under IAS 2, follow their own impairment standards.
How does this affect your finance team in practice?
Running group-wide impairment testing under IAS 36 is demanding. Gathering reliable data for cash flow projections, applying consistent discount rates across subsidiaries, allocating goodwill to CGUs and maintaining full documentation for audit purposes – all of this requires coordination across entities and clear governance over assumptions.
The Lucanet CFO Solution Platform centralizes consolidation data, standardizes impairment workflows and maintains audit-ready documentation across the group. Automated version control and consistent data aggregation reduce the risk of manual errors and give your team the time to focus on judgment-intensive work rather than data management.
Get the complete technical guide to IAS 36
Our IAS 36 whitepaper covers the full impairment methodology in depth: DCF calculation, CGU allocation, reversal rules and practical worked examples for consolidated reporting.
