Ind AS 36, Impairment of Assets, is the recoverability check behind a simple accounting question: is an asset still carried at an amount the entity can recover through use or sale? ICAI explains that an asset is impaired when its carrying amount exceeds its recoverable amount, and the excess is recognised as an impairment loss. The practical difficulty is not the formula; it is deciding when to test, whether to test an individual asset or a cash-generating unit (CGU), and how to support the assumptions used in recoverable amount.
For current first-party guidance, see ICAI’s February 2026 Educational Material on Ind AS 36, its official Educational Material PDF, and ICAI’s 2025-26 Ind AS compendium.
What is the core impairment test?
Ind AS 36 defines recoverable amount as the higher of two amounts: fair value less costs of disposal and value in use. If carrying amount is higher than recoverable amount, the asset or CGU is impaired. Importantly, an entity does not always need to calculate both measures. If one of them already exceeds carrying amount, there is no impairment and the other measure need not be estimated.
Step 1: Check for impairment indicators at each reporting date
At the end of each reporting period, an entity assesses whether there is any indication that an asset may be impaired. If an indicator exists, recoverable amount must be estimated. The indicators are not a closed list, but ICAI’s material highlights several recurring external and internal signals.
External indicators
- A significant decline in the asset’s observable value beyond what normal passage of time or use would explain.
- Adverse technological, market, economic or legal changes affecting the entity or the market in which the asset operates.
- Higher market interest rates or other market returns that may materially reduce value in use through a higher discount rate.
- The carrying amount of the entity’s net assets exceeding its market capitalisation.
Internal indicators
- Evidence of physical damage or obsolescence.
- Adverse changes in how an asset is used, such as becoming idle, planned discontinuation or restructuring, or earlier disposal.
- Internal reporting showing that the asset’s economic performance is, or is expected to be, worse than expected.
Which assets require annual testing even without an indicator?
Three categories are tested for impairment at least annually regardless of whether an impairment indicator exists: an intangible asset with an indefinite useful life, an intangible asset not yet available for use, and goodwill acquired in a business combination. This is a common control point: the absence of a trigger does not remove the annual-testing requirement for these assets.
Step 2: Decide whether to test the individual asset or a CGU
A CGU is the smallest identifiable group of assets that generates cash inflows largely independent of cash inflows from other assets or groups of assets. Recoverable amount is normally determined for an individual asset. But if the asset does not generate largely independent cash inflows and its recoverable amount cannot be determined individually, the analysis moves to the CGU to which the asset belongs.
Example: a machine may have no meaningful stand-alone cash inflows because it is one stage of an integrated production line. Testing that machine using an arbitrary stand-alone forecast can be misleading. The relevant unit may instead be the production line or another appropriately identified CGU whose cash inflows are sufficiently independent.
Step 3: Measure recoverable amount
Fair value less costs of disposal
This starts with fair value and deducts incremental costs directly attributable to disposal. ICAI’s guidance gives examples such as legal costs, stamp duty and similar transaction taxes, removal costs, and direct incremental costs to bring the asset into condition for sale. It excludes costs that are not direct incremental disposal costs.
Value in use
Value in use is the present value of future cash flows expected from the asset or CGU. The calculation incorporates expected future cash flows, their possible variation, the time value of money, uncertainty and other pricing factors relevant to the asset. ICAI’s material says cash-flow projections should rest on reasonable and supportable assumptions, with greater weight given to external evidence, and normally use the most recent management-approved budgets or forecasts for a maximum five-year period unless a longer period can be justified. The discount rate is pre-tax and reflects current market assessments of the time value of money and asset-specific risks not already reflected in the cash flows.
Worked illustration
Assume a machine has a carrying amount of ₹120 lakh. Its fair value less costs of disposal is ₹94 lakh and its value in use is ₹100 lakh. Recoverable amount is the higher figure, ₹100 lakh. Because carrying amount exceeds recoverable amount by ₹20 lakh, the impairment loss is ₹20 lakh and the carrying amount is reduced to ₹100 lakh.
Step 4: Recognise the impairment loss correctly
For an individual asset other than goodwill, if recoverable amount is below carrying amount, the carrying amount is reduced to recoverable amount. The impairment loss is generally recognised immediately in profit or loss, unless the asset is carried at a revalued amount under another Standard, in which case the impairment is treated consistently with that revaluation framework. After impairment, future depreciation or amortisation is adjusted so that the revised carrying amount, less any residual value, is allocated over the remaining useful life.
For a CGU containing goodwill, Ind AS 36 has specific allocation rules. A practical review should therefore identify the CGU and goodwill allocation before posting the impairment entry rather than treating the CGU as a single undifferentiated asset balance.
Step 5: Reassess prior impairment losses
Impairment is not always permanent. For an asset other than goodwill, a prior impairment loss can be reversed when the relevant conditions support a higher recoverable amount, but the post-reversal carrying amount cannot exceed the carrying amount that would have existed, net of depreciation or amortisation, had no impairment loss been recognised. A reversal is normally recognised in profit or loss unless the asset is carried under a revaluation model. An impairment loss recognised for goodwill is not reversed in a subsequent period.
A practical impairment-testing documentation checklist
- Record the external and internal impairment indicators considered at the reporting date, including why each relevant indicator does or does not require further testing.
- Identify whether the asset generates independent cash inflows; if not, document the CGU boundary and the reasoning for it.
- Document carrying amount and the components included in the tested asset or CGU.
- Support fair value less costs of disposal with relevant valuation evidence and identifiable disposal costs.
- For value in use, retain the approved budgets or forecasts, key operating assumptions, external evidence, growth assumptions and discount-rate support.
- Check that cash flows reflect the asset in its current condition and that assumptions are internally consistent rather than selectively optimistic.
- Reconcile the recoverable amount calculation to the accounting entry and recalculate future depreciation or amortisation after impairment.
- For previously impaired assets, reassess whether reversal indicators exist and apply the reversal ceiling; do not reverse goodwill impairment.
Common mistakes to avoid
- Testing only when there is an obvious physical problem and overlooking market, economic, legal or performance indicators.
- Forgetting annual testing for indefinite-life intangibles, intangibles not yet available for use and acquired goodwill.
- Using the lower instead of the higher of fair value less costs of disposal and value in use.
- Creating an artificial stand-alone forecast for an asset whose cash inflows are not independent instead of identifying the appropriate CGU.
- Using unsupported forecasts or discount rates that are inconsistent with the cash-flow assumptions.
- Reversing goodwill impairment after business conditions improve.
Practical takeaway
A defensible Ind AS 36 process follows a clear sequence: scan for indicators, identify the correct testing unit, calculate recoverable amount using supportable assumptions, recognise any shortfall, and revisit prior losses for possible reversal where the Standard permits it. The strongest impairment file is not the one with the most spreadsheet tabs; it is the one that clearly connects business evidence, CGU logic, valuation assumptions and the final accounting treatment.
