Impairment of Assets IAS 36: Practical Guide

What is impairment of assets IAS 36?

Impairment of assets IAS 36 is the rule that stops a company from carrying an asset at more than it can recover. The simple test is this: compare the asset's carrying amount with its recoverable amount. If the carrying amount is higher, the difference is an impairment loss.

That sounds technical, but the business idea is familiar. A machine may still be on the [balance sheet](/glossary#balance-sheet) at SAR 700,000 even though demand for the product collapsed. A store leasehold improvement may still have three years left, but the branch is no longer expected to generate enough cash. IAS 36 tells the accountant not to wait until the asset is sold or scrapped. If the loss in value already exists, the financial statements should show it.

This is different from normal [depreciation](/glossary#depreciation). Depreciation allocates cost over useful life. Impairment asks whether the remaining carrying amount is still recoverable. If you already understand [how to calculate depreciation](/learn/how-to-calculate-depreciation), think of impairment as a separate safety check after depreciation has done its usual work.

How do you calculate impairment of assets IAS 36?

The calculation has three steps. First, find the carrying amount after accumulated depreciation or amortisation. Second, estimate the recoverable amount. Third, record an impairment loss only if carrying amount is higher than recoverable amount.

Under [IFRS](/glossary#ifrs), recoverable amount is the higher of: - Fair value less costs of disposal — what the asset could be sold for, net of direct disposal costs. - Value in use — the present value of cash flows expected from using the asset in its current condition.

You do not always need both numbers. If one estimate is clearly above carrying amount, there is no impairment and you can stop. If both are below carrying amount, use the higher one as recoverable amount because IAS 36 measures what the entity can recover through either use or sale.

The recoverable amount is SAR 560,000 because it is higher than SAR 510,000. The impairment loss is SAR 60,000, not SAR 110,000.

When should a company test for impairment?

Most assets are tested when there is an impairment indicator. IAS 36 asks management to look for external and internal signs at each reporting date. External signs include a major fall in market value, worse economic conditions, higher discount rates, legal restrictions, or technological change. Internal signs include physical damage, poor asset performance, plans to discontinue a product line, or evidence that cash flows will be weaker than expected.

Some assets need an annual test even if there is no obvious warning sign. Goodwill from a business combination, intangible assets with indefinite useful lives, and intangible assets not yet available for use are tested every year. That annual rule exists because these assets can be hard to monitor through normal depreciation patterns.

For students in Saudi Arabia, the practical trigger is often a board decision or month-end review. A Riyadh retailer closes underperforming branches. A Dammam manufacturer loses a major customer. A Jeddah clinic has equipment that is still usable but no longer supports the expected patient volume. These are not just operational stories. They are accounting indicators that may require an impairment test before the [income statement](/glossary#income-statement) and [balance sheet guide](/learn/balance-sheet-guide) can be trusted.

Worked example 1: single machine impairment

Scenario: Al Noor Manufacturing bought a packaging machine for SAR 900,000. Accumulated depreciation is SAR 260,000, so the carrying amount is SAR 640,000. A new competitor entered the market, and the machine is now expected to generate lower cash margins. Management estimates fair value less costs of disposal at SAR 500,000 and value in use at SAR 575,000.

Analysis: - Carrying amount: SAR 640,000 - Recoverable amount: SAR 575,000 - Impairment loss: SAR 65,000

The asset is impaired because the company cannot recover the full SAR 640,000 through use or sale. The [journal entry](/glossary#journal-entry) reduces the asset's carrying amount and records a loss in profit or loss.

After the entry, future depreciation is based on the revised carrying amount of SAR 575,000, less any residual value, over the remaining useful life. Do not go back and rewrite old depreciation. The impairment is recognized now because the evidence exists now.

Worked example 2: cash-generating unit and goodwill

Sometimes one asset does not generate independent cash inflows. A coffee roaster, delivery van, point-of-sale system, and brand campaign may work together as one branch network. In that case, IAS 36 uses the smallest group of assets that generates largely independent cash inflows. This is called a cash-generating unit.

Scenario: Najd Coffee Group bought a small chain in Khobar and recognized goodwill. The Khobar unit has these carrying amounts:

The unit's recoverable amount is SAR 820,000, so the impairment loss is SAR 180,000. Because goodwill is included in the unit, IAS 36 allocates the impairment to goodwill first.

If the impairment had been SAR 260,000, the first SAR 180,000 would reduce goodwill to zero, and the remaining SAR 80,000 would be allocated to the other assets on a reasonable basis. This CGU logic is one reason impairment questions appear in SOCPA and ACCA-style cases.

What changes after an impairment loss?

After impairment, the asset does not disappear unless it has no carrying amount left. The company continues using the revised carrying amount for future depreciation or amortisation. If the asset has four years of useful life remaining, the new depreciable amount is spread over those four years.

This is where students often mix two topics. The impairment loss hits the [income statement](/learn/income-statement-explained) immediately unless the asset is carried under a revaluation model and the loss is treated as a revaluation decrease. Future depreciation then becomes lower because the carrying amount is lower. The two effects are related, but they are not the same entry.

IAS 36 also allows reversal of impairment for many assets when the estimates improve. The reversal is limited: the new carrying amount cannot exceed what the asset would have carried if no impairment had been recognized. Goodwill is stricter. An impairment loss on goodwill is not reversed in a later period.

This treatment follows [accrual accounting](/glossary#accrual-accounting). The loss is recognized when the recoverability problem exists, not when cash is paid. No cash leaves the company on the day the impairment entry is posted.

Common mistakes in impairment of assets IAS 36

1. Treating every fall in market price as impairment A price drop is an indicator, not the calculation. You still compare carrying amount with recoverable amount.

2. Using fair value only Recoverable amount is the higher of fair value less costs of disposal and value in use. If value in use is higher, it can protect the asset from impairment even when sale value is low.

3. Including future expansion cash flows too early Value in use is based on the asset in its current condition. Do not include cash flows from uncommitted restructurings, future enhancements, or expansion plans that are not part of the current asset.

4. Forgetting scope exceptions Inventories are tested under IAS 2, financial assets under IFRS 9, deferred tax assets under IAS 12, and assets held for sale under IFRS 5. IAS 36 is broad, but it is not the impairment rule for every asset.

5. Reversing goodwill impairment This is a frequent exam trap. Many impairment losses can reverse if estimates improve, but goodwill impairment cannot be reversed under IAS 36.

How to practise impairment entries

A good impairment problem should force you to separate the accounting decision from the arithmetic. Start by identifying the asset or cash-generating unit. Then list the carrying amount, fair value less costs of disposal, and value in use. Only after that should you calculate the loss and write the entry.

Here is a quick practice pattern: - Decide whether IAS 36 applies or another standard applies. - Identify whether you are testing one asset or a cash-generating unit. - Pick the higher recoverable amount. - Compare it with carrying amount. - Record the impairment loss and update future depreciation.

Accountery practice exercises are useful here because impairment is not just a definition topic. You need to choose the right accounts, keep debit and credit equal, and explain why the loss belongs in the period. Practise a machine impairment, then a cash-generating unit with goodwill, then a reversal scenario. By the third case, impairment of assets IAS 36 becomes a repeatable workflow instead of a memorized paragraph.