IAS 36 Explained 2025: Full Impairment Guide + Free Practical Checklist Making IFRS Easy

Depreciation refers to the reduction of an asset’s value over time due to wear and tear or obsolescence. It is a non-cash expense that companies record on their income statements as they utilize assets in their operations. Depreciation schedules, such as straight-line or accelerated methods, help determine the annual depreciation expense for an asset throughout its useful life. If the circumstances that caused the impairment of a tangible asset change or no longer exist, the impairment loss may be reversed, subject to certain limitations. The reversal of the impairment loss increases the carrying amount of the asset and is recognized as income in the income statement.

Impairment Calculation: IFRS’s Approach

Using the same example above, the sum of undiscounted future cash flows is $30,000, which is lower than the carrying amount of $38,000. According to the second step, the impairment loss will be $8,000 ($38,000 – $30,000). If the fair market value is unknown, the impairment loss will be $9,161 ($38,000 – $28,839). For example, assume an asset is expected to create $10,000 cash income per year for the next three years at a discount rate of 2%, so its value in use is $28,839 in the current year.

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Impaired assets can have a significant impact on a company’s financial health and performance. Understanding the meaning of impaired assets, the causes behind their impairment, how to test for impairment, and how to record them is crucial for individuals and businesses alike. Company XYZ performs an impairment test and determines that the recoverable amount of the goodwill is only $1.5 million. As a result, an impairment loss of $0.5 million ($2 million – $1.5 million) is recognized in the income statement. The carrying amount of the goodwill is reduced to $1.5 million in the balance sheet. As per the Generally Accepted Accounting Principles, companies are required to test the goodwill and other certain intangible assets every year for the impairments.

Understanding Impaired Assets: Identification, Calculation, and Reporting

Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy. Businesses should regularly assess their assets to determine whether they are being depreciated appropriately or if they need to recognize impairment. Businesses must test their assets impaired asset meaning for impairment whenever there are signs that an asset may have lost value, such as after a natural disaster or an economic downturn.

Impairment Calculation: GAAP’s Approach

While both depreciation and impairment involve a loss of value, the key difference lies in how they are applied. The units of production method ties depreciation to the actual use of the asset, meaning depreciation varies based on how much the asset is used. Depreciation is a planned and systematic process, as businesses expect assets to lose value gradually. Costs of disposal are for example legal costs, stamp duties and similar transaction taxes, costs of removing the asset and direct incremental costs to bring an asset into condition for its sale.

Brand engagement is a critical concept in the realm of marketing and brand strategy, representing… In the modern business landscape, companies are constantly grappling with the challenge of… In the realm of modern commerce, the direct line that connects businesses to consumers is not just… The recoverable amount of the vehicle is its net realizable value of $80,000, which is higher than its value in use.

The carrying amount represents the cost of the asset minus any accumulated depreciation or amortization. The recoverable amount, on the other hand, is the higher of an asset’s fair value less costs to sell or its value in use. Several factors can lead to asset impairment, such as technological advancements, changes in market conditions, legal or regulatory changes, and physical damage or obsolescence.

When the carrying amount of an asset is higher than its recoverable amount, the asset is considered impaired, and the company needs to adjust its value on the balance sheet accordingly. Now let’s explore IFRS and its approach to accounting for impairment losses. Similar to GAAP, IFRS requires that impairment losses be recognized when an asset’s carrying amount exceeds its recoverable value.

What Does Impairment Mean in Accounting?

• Similarly, commodity companies may experience losses if the price of their primary product decreases significantly.
• If the recoverable value is less than the carrying amount, an impairment loss should be recognized.
• The impairment loss should be recognized as an expense in the income statement, unless the asset is carried at revalued amount, in which case the impairment loss should be recognized in other comprehensive income.
• Although the terms are sometimes used interchangeably, impairment and depreciation represent distinct concepts in accounting.
• The carrying amount of the goodwill is reduced to $1.5 million in the balance sheet.

When an impairment loss is recognized, periodic depreciation charges must be adjusted accordingly to reflect the new carrying value of the impaired asset. The events and circumstances that led to the recognition or reversal of the impairment loss. The entity should also disclose the assumptions and estimates used to determine the recoverable amount, such as the discount rate, the growth rate, the cash flow projections, and the valuation technique. Another way to estimate the fair value of an asset is to use observable market prices or appraisals from independent experts.

• Under certain circumstances, an impairment loss recognized under IFRS may be reversed if conditions improve, whereas such a reversal is generally not permitted under GAAP.
• An impairment charge is a non-cash expense, meaning it does not involve an outflow of cash; instead, it reflects a revaluation of an asset’s worth.
• These revised expected cash flows are discounted at the same effective interest rate used when the instrument was first acquired, therefore retaining a cost-based measurement.
• This difference can lead to varying reported figures for the same company depending on which accounting standard is followed.
• Companies compare the asset’s carrying value (original cost minus depreciation) to its recoverable amount, which is essentially the future economic benefits it’s expected to generate.
• Understanding the meaning of impaired assets, the causes behind their impairment, how to test for impairment, and how to record them is crucial for individuals and businesses alike.

An impaired asset no longer carries the same market value as what is listed in the records of a business. Because its value is now reduced, the impaired asset is recorded as a loss in the business balance sheet. As businesses navigate dynamic economic landscapes, the proper recognition and evaluation of impaired assets play a pivotal role in maintaining financial integrity. Changes in Market ConditionsMarket fluctuations can significantly influence the value of assets, leading to impairments when circumstances alter the market demand for goods or services related to an asset.

IAS 36 applies to all assets except those for which other Standards address impairment. To calculate impairment, the asset’s book value is compared to the net income it generates or its fair market value. The reason for impairment is important because this affects the calculation of fair market value.

An earthquake hit the city, and the company’s warehouse was seriously affected. One of several accelerated depreciation methods or a straight-line method is used to calculate the amount of depreciation that will be taken during each accounting period. Impairment of Assets is usually found in Balance Sheet items like goodwill, long-term assets, inventory, and accounts receivables.

Identifying and accounting for asset impairment is essential for accurate financial reporting and decision-making processes within an organization. According to U.S. accounting rules (known as US GAAP), the value of an asset is impaired when the sum of estimated future cash flows from that asset is less than its book value. At this point an impairment loss should be recognized, which is done by taking the difference between the fair market value (FMV) and the book value and recording this amount as the loss. When an asset is deemed impaired, the company needs to write down its value on the balance sheet to reflect its current market worth.