IAS 36 Impairments

IAS 36 ensures that assets are not carried at more than their recoverable amount, preventing overstatement of asset values.

Impairment occurs when an asset’s carrying amount exceeds its recoverable amount.

The HIGHER of:-

Fair Value Less Costs to Sell (FVLCTS)
Value in Use (VIU) (present value of future cash flows)

📉 External Indicators:

Market value decline
Adverse legal or regulatory changes
Increased interest rates affecting value
⚙️
Internal Indicators:

Asset is obsolete or damaged
Poor performance of the asset
Change in business strategy affecting asset use

Annually for goodwill and intangible assets with indefinite life
When there is an indication that an asset may be impaired

A: By estimating future cash inflows and outflows from the asset and discounting them to present value.

✅ The impairment loss is recognized in profit or loss
✅ The asset’s carrying amount is reduced to its recoverable amount

: A CGU is the smallest group of assets that generates cash flows independently from other assets. Impairment is tested at the CGU level when individual asset impairment is difficult.

📌 The amount of impairment losses recognized or reversed
📌 The events leading to impairment
📌 How recoverable amounts were determined (FVLCTS or VIU)
📌 Key assumptions used in VIU calculations

📉 Lower asset values on the balance sheet
📉 Increased expenses in the income statement
📉 Lower profitability

Journal Entry for Impairment Loss:
📉 Dr. Impairment Loss (Expense – Profit or Loss)
📉 Cr. Asset (Reduce carrying amount on Balance Sheet)

Example: If an asset with a carrying amount of £50,000 has a recoverable amount of £35,000, the journal entry is:
✅ Dr. Impairment Loss £15,000
✅ Cr. Asset £15,000