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IAS 36

Impairment of Assets

IAS 36 requires an entity to ensure that its assets are not carried at more than their recoverable amount, setting out when to test for impairment, how to determine recoverable amount for individual assets and cash-generating units, and when a previously recognised impairment loss (other than for goodwill) may be reversed. [S1]

Effective 2004-03-31Related: IAS 1 · IAS 16 · IAS 21 · IAS 37

Overview

The core principle in IAS 36 is that an asset must not be carried at more than the higher amount recoverable through its use or sale; if the carrying amount exceeds recoverable amount, the asset is impaired and must be written down, with the loss recognised immediately. [S1] Where an individual asset's recoverable amount cannot be estimated (because it does not generate largely independent cash inflows), the asset is tested for impairment as part of the smallest group of assets that does — a cash-generating unit (CGU). [S2]

Why it matters

Impairment testing forces management to confront whether the economics that justified an asset's carrying amount still hold, rather than letting depreciation alone erode the balance sheet gradually. In volatile operating environments, assets that looked sound at acquisition can quickly become impaired due to demand shocks, cost inflation, regulatory change, or a shift in expected future cash flows — and failing to test and write down promptly overstates both assets and equity to lenders and investors.

Scope

IAS 36 applies to most non-financial assets, predominantly PPE, right-of-use assets, intangible assets, goodwill, and investments in subsidiaries, associates and joint ventures in separate financial statements. It excludes assets with their own impairment models under other Standards: inventories (IAS 2), assets arising from construction contracts, deferred tax assets (IAS 12), employee benefit assets (IAS 19), financial assets within the scope of IFRS 9, investment property measured at fair value (IAS 40), and biological assets measured at fair value less costs to sell (IAS 41).

Key definitions

term
Recoverable amount
definition
The higher of an asset's (or CGU's) fair value less costs of disposal and its value in use.
term
Value in use
definition
The present value of the future cash flows expected to be derived from an asset or CGU.
term
Fair value less costs of disposal
definition
Fair value determined under IFRS 13, less the incremental costs directly attributable to the disposal of the asset or CGU.
term
Cash-generating unit (CGU)
definition
The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
term
Impairment loss
definition
The amount by which the carrying amount of an asset or CGU exceeds its recoverable amount.
term
Corporate assets
definition
Assets other than goodwill that contribute to the future cash flows of both the CGU under review and other CGUs (e.g. a head office building).

Recognition

An entity assesses at each reporting date whether there is any indication that an asset may be impaired, considering both external sources (market value declines, adverse changes in the technological, market, economic or legal environment, increases in market interest rates affecting the discount rate, or the entity's market capitalisation falling below net asset value) and internal sources (evidence of obsolescence or physical damage, adverse changes in how an asset is used or is expected to be used, and evidence that economic performance is or will be worse than expected). Goodwill and intangible assets with an indefinite useful life, or not yet available for use, are tested for impairment at least annually regardless of whether an indicator exists. Where an indicator exists, or annual testing is required, the entity estimates recoverable amount and recognises an impairment loss if the carrying amount exceeds it.

Initial measurement

There is no separate initial-measurement step distinct from recognition; when an impairment loss is identified, the asset (or CGU) is written down to recoverable amount immediately, with the loss recognised in profit or loss (or treated as a revaluation decrease, to the extent of any revaluation surplus, for a revalued asset under IAS 16). For a CGU, an impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU, then pro-rata to the other assets in the CGU based on their carrying amounts, subject to not reducing any individual asset below the highest of its own fair value less costs of disposal, value in use (if determinable), and zero.

Subsequent measurement

After an impairment loss is recognised, depreciation/amortisation of the written-down asset is adjusted prospectively over its remaining useful life. At each subsequent reporting date, the entity assesses whether there is any indication that a previously recognised impairment loss (other than for goodwill, which can never be reversed) may no longer exist or may have decreased; if so, and if there has been a genuine change in the estimates used to determine recoverable amount, the impairment loss is reversed, but the increased carrying amount cannot exceed what the carrying amount (net of depreciation) would have been had no impairment loss been recognised in prior periods.

Presentation

Impairment losses (and reversals) on assets carried under the cost model are recognised in profit or loss; for a revalued asset, an impairment loss is first recognised in other comprehensive income to the extent of any revaluation surplus for that asset, with any excess in profit or loss, and a reversal follows the mirror-image treatment. Impairment losses relating to a CGU are disclosed showing the amount allocated to goodwill and to other assets, with sufficient description of the CGU (or group of CGUs) for users to understand the basis of allocation.

Disclosure checklist

  • For each class of assets: the amount of impairment losses recognised in profit or loss (and the line item(s) in which they are included), and the amount of any reversals.
  • The amount of impairment losses (and reversals) recognised in other comprehensive income during the period.
  • For each material impairment loss or reversal recognised: the events and circumstances leading to it, the amount, whether recoverable amount is fair value less costs of disposal or value in use, and the discount rate(s) used if value in use.
  • For goodwill and indefinite-life intangible assets: the carrying amount allocated to each CGU (or group of CGUs) significant in comparison to the entity's total carrying amount of such assets.
  • Key assumptions used in determining recoverable amount for CGUs containing goodwill or indefinite-life intangibles (e.g. growth rates, discount rates), and a sensitivity disclosure where a reasonably possible change in a key assumption would cause the carrying amount to exceed recoverable amount.

Practical treatment

In practice, the hardest judgements are (1) defining CGUs correctly — too broad a CGU can mask impairment in an underperforming unit by blending it with a stronger one; (2) choosing between value in use and fair value less costs of disposal, and building a defensible discount rate and cash flow forecast for value in use; and (3) allocating and reallocating goodwill when a CGU structure changes (e.g. after a reorganisation). Value-in-use forecasts should reflect the asset's current condition, excluding future restructuring the entity is not yet committed to and future capital expenditure that would enhance (rather than merely maintain) the asset's performance. See nigeria_notes for the practical challenges of building a defensible valuation and discount rate in the Nigerian market.

Common mistakes

  • Defining CGUs too broadly, netting a struggling unit's cash flows against a healthy one and masking a real impairment.
  • Building value-in-use cash flow forecasts that include the benefit of a future restructuring or capacity-enhancing capital expenditure the entity is not yet committed to.
  • Using a discount rate that does not reflect current market assessments of the time value of money and asset-specific risks (e.g. applying a group weighted average cost of capital without adjusting for country or currency risk specific to the CGU).
  • Reversing a goodwill impairment loss, which is never permitted under IAS 36 regardless of how conditions improve.
  • Failing to test goodwill and indefinite-life intangibles annually simply because no obvious impairment indicator was observed during the year.

CFO checklist

  • Maintain a documented CGU structure that reflects how management actually monitors cash flows internally, and revisit it whenever the business is reorganised.
  • Perform (and document) an impairment indicator review at every reporting date for all asset classes, not just an annual goodwill test.
  • Build value-in-use models using board-approved forecasts, a defensible discount rate with a clear derivation, and exclude uncommitted restructuring and enhancement capex.
  • Obtain fair-value-less-costs-of-disposal estimates from suitably qualified, and where relevant independent, valuers for material assets.
  • Prepare the sensitivity disclosure for goodwill/indefinite-life-intangible CGUs where a reasonably possible change in a key assumption could trigger impairment.
  • Never reverse a goodwill impairment loss, regardless of subsequent performance improvement.

FAQs

q
Our subsidiary's revenue has fallen but it's still profitable — do we need to test for impairment?
a
A fall in revenue or profitability against expectations is itself one of the internal indicators IAS 36 requires an entity to consider; even if the CGU remains profitable, if performance is worse than expected this is enough to trigger a recoverable amount assessment, not just an automatic conclusion that no impairment exists.
q
Can we reverse an impairment loss on goodwill if the business recovers strongly?
a
No. IAS 36 explicitly prohibits reversal of an impairment loss recognised for goodwill, even where the underlying reasons for the original impairment have clearly reversed.
q
What discount rate should we use for a Nigerian CGU's value-in-use calculation?
a
A pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the CGU's cash flows, which in practice usually means starting from a market-observable cost of capital and adjusting for Nigeria-specific country, currency and sector risk rather than applying an unadjusted global group rate. See nigeria_notes.

Nigeria application notes

Regulatory overlay

IAS 36 applies in full to Nigerian public interest entities under the FRCN Act 2011 mandate. [S3] From 1 January 2026, valuations obtained to support a fair-value-less-costs-of-disposal recoverable amount estimate for financial reporting purposes should also have regard to the FRCN's Valuation Regulations for Financial Reporting, which govern who may perform such valuations in Nigeria; the Regulations were at exposure-draft stage when reviewed for this file and their final, in-force status should be confirmed. [S4]

Tax interaction (Nigeria)

An impairment loss recognised under IAS 36 is an accounting write-down and is not automatically an allowable deduction for companies income tax purposes; capital allowances continue to be computed on qualifying capital expenditure under the Nigeria Tax Act 2025's separate rules regardless of an accounting impairment charge, and any tax consequence of a subsequent disposal at a loss should be assessed against the current capital gains tax and capital allowance balancing provisions rather than assumed to mirror the accounting entries. [S_TAX1][S_TAX2] Nigerian rates, thresholds, exemptions, incentives and filing rules referenced in this file (including CIT, VAT, capital allowance rates and the small-company threshold) should be independently verified against the Nigeria Tax Act 2025, the Nigeria Tax Administration Act 2025, and current NRS practice in force at the reporting or filing date, since thresholds, rates and reliefs are subject to periodic revision and to sector- or entity-specific qualifying conditions. This file does not constitute legal or tax advice. [S_TAX1][S_TAX2]

FX considerations

For a Nigerian entity or CGU with material foreign-currency-denominated costs or revenues, naira volatility affects both the cash flow forecast (via input costs and pricing) and the discount rate (via country and currency risk premia) used in a value-in-use calculation; a single global discount rate applied without a Nigeria-specific adjustment is unlikely to be defensible. Where CBN monetary policy tightening (e.g. sustained high Monetary Policy Rate and cash reserve ratio settings) raises the cost of local financing, this is relevant context for deriving a market-consistent discount rate for naira cash flows. [S6]

SME practical note

Owner-managed Nigerian businesses often lack a formal CGU structure or a documented discount rate methodology; Outliers recommends establishing both as part of any IFRS conversion engagement, since an impairment conclusion reached without a documented, defensible basis for recoverable amount is one of the most common audit findings in first-time IFRS engagements.

Common Nigerian pitfalls

  • Applying an unadjusted global or parent-company discount rate to Nigerian naira cash flows without a country/currency risk adjustment.
  • Treating an accounting impairment loss as automatically tax-deductible without checking the current capital allowance and capital gains tax rules.
  • Building value-in-use forecasts on macroeconomic assumptions that are inconsistent with the entity's own disclosed inflation, growth, and hyperinflation-status assumptions elsewhere in the financial statements.
  • Relying on an informal internal valuation for fair value less costs of disposal on a material asset without considering the FRCN Valuation Regulations framework once confirmed in force.

FRC pronouncements

The FRCN's January 2025 position that Nigeria is not a hyperinflationary economy for IAS 29 purposes is indirectly relevant to IAS 36: value-in-use forecasts for naira-denominated CGUs should reflect the same macroeconomic assumptions (inflation, growth) an entity is using elsewhere in its financial statements, and this FRC position should be reassessed for the current reporting year before finalising impairment discount rate and cash flow assumptions. [S5]

Worked examples

Impairment of a cash-generating unit with goodwill

A CGU has a carrying amount of ₦500,000,000, including goodwill of ₦60,000,000, PPE of ₦350,000,000 and other identifiable net assets of ₦90,000,000. Following a sustained decline in demand, management estimates the CGU's recoverable amount (value in use) at ₦420,000,000.

Facts

Workings

Total impairment loss: 500,000,000 - 420,000,000 = 80,000,000

Step 1 — allocate first to goodwill: goodwill of 60,000,000 is fully written off.

Step 2 — remaining impairment to allocate: 80,000,000 - 60,000,000 = 20,000,000

Allocate the remaining 20,000,000 pro-rata across PPE and other net assets based on carrying amounts (350,000,000 : 90,000,000 = 79.5% : 20.5%, approximately):

PPE share: 20,000,000 x (350,000,000/440,000,000) ≈ 15,909,000 (rounded)

Other net assets share: 20,000,000 x (90,000,000/440,000,000) ≈ 4,091,000 (rounded)

Journal entries

Recognise the impairment loss on the cash-generating unit, allocated first to goodwill and then pro-rata to the remaining assets.

AccountDr (₦)Cr (₦)
Impairment loss (profit or loss)80,000,000
Goodwill60,000,000
Property, plant and equipment (accumulated impairment)15,909,000
Other net assets (accumulated impairment)4,091,000

Reversal of a prior impairment loss on plant (non-goodwill asset)

A machine was impaired two years ago, reducing its carrying amount from ₦80,000,000 to ₦50,000,000. Since then, ₦10,000,000 of depreciation has been charged on the reduced carrying amount. Market conditions have genuinely improved and the machine's recoverable amount is now assessed at ₦55,000,000. Had no impairment ever been recognised, the machine's carrying amount today (after normal depreciation) would have been ₦48,000,000.

Facts

Workings

Current carrying amount: 40,000,000

Recoverable amount: 55,000,000

Indicated reversal (uncapped): 55,000,000 - 40,000,000 = 15,000,000

Ceiling test: the reversed carrying amount cannot exceed what it would have been (net of depreciation) had no impairment ever been recognised, i.e. 48,000,000.

Maximum permitted reversal: 48,000,000 - 40,000,000 = 8,000,000

The reversal is capped at 8,000,000, not the full 15,000,000 indicated by the recoverable amount.

Journal entries

Recognise the impairment reversal on plant, capped at the amount that restores carrying amount to no more than the depreciated historical cost that would have applied had no impairment been recognised.

AccountDr (₦)Cr (₦)
Plant and equipment (accumulated impairment)8,000,000
Impairment reversal (profit or loss)8,000,000

Sources & citations

  1. [S1]IAS 36 Impairment of Assets — IFRS Foundationaccessed 2026-07-18
  2. [S2]IAS 36 Impairment of Assets — IFRS in Brief — Moore Globalaccessed 2026-07-18
  3. [S3]IFRS - Use of IFRS Standards by jurisdiction: Nigeria — IFRS Foundationaccessed 2026-07-18
  4. [S4]Call for Comments: Exposure Draft on Valuation Regulations for Financial Reporting, 2024 — Financial Reporting Council of Nigeriaaccessed 2026-07-18
  5. [S5]FRC's Position on IAS 29 – Financial Reporting in Hyperinflationary Economies — Financial Reporting Council of Nigeriaaccessed 2026-07-18
  6. [S6]Monetary Policy Decisions — Central Bank of Nigeriaaccessed 2026-07-18
  7. [S_TAX1]Nigeria's 2025 Tax Reform Acts Explained: Key Changes — Baker Tilly Nigeriaaccessed 2026-07-18
  8. [S_TAX2]Nigeria Tax Act, 2025 has been signed – highlights — EY Globalaccessed 2026-07-18
Last reviewed 2026-07-18 · Reviewer: Rafiu Olawuyi, FCA (Author / Technical Reviewer)