IAS 36 Impairment of Assets: Indicators, Recoverable Amount and VIU vs FVLCD

IAS 36 Impairment of Assets: Indicators, Recoverable Amount and VIU vs FVLCD

By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)

Lead Instructor, Global Fin X | www.globalfinx.in/manikanta

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IAS 36 has one purpose: prevent companies from carrying assets at more than they are worth. That sounds straightforward. In practice, impairment testing is one of the most judgment-intensive areas in financial reporting, requiring management to forecast cash flows, choose discount rates, define what constitutes a cash-generating unit, and determine which of two measurement approaches best reflects recoverable value.

NFRA held a dedicated webinar on Ind AS 36 in November 2025, signalling the regulator's concern that Indian companies are not applying the standard rigorously enough. The IASB simultaneously has an exposure draft proposing amendments to goodwill impairment disclosures. IAS 36 is not a settled, static standard. It is actively scrutinised.

This post covers the scope and indicators framework, the recoverable amount concept, the distinction between value in use and fair value less costs of disposal, and the worked mechanics of an impairment test. Post 40 covers CGU identification, goodwill allocation, and impairment reversal.

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Scope: What IAS 36 Covers and What It Does Not

IAS 36 applies to most non-financial assets. The key exclusions are assets that have their own impairment mechanism built into another standard:

Inventories (IAS 2: lower of cost and NRV). Deferred tax assets (IAS 12: recoverability assessed separately). Financial assets within IFRS 9 scope (ECL model). Contract assets under IFRS 15 (IFRS 9 ECL applies). Investment property measured at fair value under IAS 40 (fair value already reflects any diminution). Biological assets measured at fair value less costs to sell under IAS 41. Non-current assets held for sale under IFRS 5 (lower of carrying amount and FVLCTS test applies instead).

Everything else falls under IAS 36: property, plant and equipment, right-of-use assets, intangible assets (finite and indefinite life), goodwill, investments in subsidiaries, associates and joint ventures in the investor's separate financial statements, and certain other assets.

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The Two-Track Approach to Testing

IAS 36 distinguishes between assets that must be tested annually regardless of indicators, and assets that are tested only when indicators of impairment exist.

Mandatory annual test (no indicators required):

Goodwill acquired in a business combination. Intangible assets with indefinite useful lives. Intangible assets not yet available for use.

These three categories are tested every year because their carrying amounts depend significantly on future judgments that can deteriorate without obvious observable symptoms. A brand with indefinite useful life may be eroding slowly due to competitive pressure. Goodwill may not be generating the expected synergies. An in-process R&D asset may face technical setbacks. Annual testing catches deterioration that indicators might miss.

Indicator-based testing (all other assets):

At each reporting date, the entity assesses whether any indicator of impairment exists. If yes, the entity estimates the recoverable amount and compares it to the carrying amount. If no indicator exists, no impairment test is required.

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Impairment Indicators: Internal and External

IAS 36 provides a non-exhaustive list of indicators. The presence of one or more indicators does not automatically mean the asset is impaired; it means a test must be performed.

External Indicators

Significant and unexpected decline in the asset's market value during the period: the market price of a listed subsidiary drops materially below its carrying value in the parent's consolidated statements.

Significant negative changes in the technological, market, economic, or legal environment: new regulation requiring costly upgrades to an existing asset, market shift rendering a technology obsolete, or commodity price collapse affecting an extractive asset's future cash flows.

Increase in market interest rates: higher discount rates reduce value in use calculations directly. A 100 basis point increase in risk-free rates, sustained across a period, is an external impairment indicator for most long-lived assets.

Market capitalisation below the carrying amount of net assets: if an entity's total market cap falls below its consolidated net book value, the entire net asset base is signalling potential impairment. This is one of the most commonly cited indicators for Indian conglomerates operating in sectors facing cyclical or structural headwinds.

Internal Indicators

Evidence of physical damage or obsolescence. A factory damaged by a flood, equipment declared obsolete by a technology shift, or an office building structurally compromised.

Significant adverse changes in the extent or manner of use: restructuring decisions, plans to discontinue or idle an operation, or an earlier-than-expected disposal date.

Internal reporting showing economic performance significantly worse than budgeted: cash flows, profits, or revenues materially below the plan used to justify the asset's carrying amount.

Plans to restructure or dispose of the operation to which the asset belongs.

Climate-Related Indicators

This is an emerging area. KPMG and other Big 4 firms have explicitly flagged climate-related factors as IAS 36 indicators. Regulatory changes accelerating asset phase-out (for example, mandatory transition away from coal-fired power), shifts in customer preference reducing an asset's revenue-generating capacity, and increased carbon costs making certain production facilities uneconomic are all external indicators under IAS 36's framework, even though the standard was written before climate risk became central to financial reporting.

For Indian companies in thermal power, cement, steel, and petrochemicals, climate transition risk is now a live impairment indicator requiring assessment. Tata Steel, NTPC, and Coal India all face external pressures from carbon transition policies that require impairment indicator assessment even if they do not automatically trigger impairment charges.

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The Recoverable Amount: The Core Measurement

Once an impairment indicator is identified (or for annual tests on goodwill and indefinite-life intangibles), the entity estimates the recoverable amount.

Recoverable amount = Higher of FVLCD and VIU

The higher of the two is used because it represents the best economic outcome available to the entity from the asset. If the entity can sell the asset for more than it can generate by using it, the selling price sets the floor. If using the asset generates more value than selling it, the use value sets the floor.

An entity does not need to calculate both measures. If either one individually exceeds the carrying amount, no impairment exists and no further calculation is needed.

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Fair Value Less Costs of Disposal (FVLCD)

FVLCD is the amount obtainable from the sale of an asset or CGU in an orderly transaction between market participants at the measurement date, less the costs of disposal. Fair value is determined under IFRS 13.

Costs of disposal are incremental costs directly attributable to the disposal: broker commissions, legal fees, stamp duties on the transfer, and costs of dismantling or removing the asset. Finance costs and income tax are excluded from costs of disposal.

FVLCD reflects a market view: what would a willing buyer pay? It does not require the entity to intend to sell the asset; it is a hypothetical transaction price used as a measurement floor.

For assets with observable market prices (listed securities, traded commodities, real estate with active comparable transactions), FVLCD is relatively straightforward. For specialised assets with no active market, FVLCD requires a valuation technique under IFRS 13: income approach (DCF with market participant assumptions), market approach (comparable transactions), or cost approach (replacement cost less obsolescence).

FVLCD is often the preferred approach for assets where management believes the market would value the business at a premium to book value: a well-located commercial property, a strong brand, or a business with strategic value to an acquirer. It uses market participant assumptions rather than entity-specific projections.

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Value in Use (VIU)

VIU is the present value of the future cash flows expected to be derived from an asset or CGU in its current condition.

IAS 36 is specific about what goes into VIU and what does not.

What VIU Includes

Estimates of future cash flows the entity expects to derive from the asset in its current condition. This means cash flows from continuing to use the asset as it is today, plus the eventual disposal proceeds (the residual) at the end of its useful life.

Multiple cash flow scenarios can be used. IAS 36 permits either probability-weighted cash flows across scenarios or a risk-adjusted single cash flow scenario. Both produce the same result if applied correctly; probability-weighted cash flows are more transparent.

What VIU Excludes

Cash flows from future restructuring: if management plans to restructure the business unit to improve its performance, those restructuring-related cash flow improvements cannot be included in VIU until the restructuring is committed and the costs are recognised as a liability under IAS 37.

Cash flows from improving or enhancing the asset: VIU reflects the asset in its current condition. Expected cash flows from a major capital upgrade not yet committed are excluded.

Tax cash flows: VIU is calculated on a pre-tax basis, using a pre-tax discount rate. Income tax is excluded from both the cash flows and the rate. This is the standard's approach to avoid the complexity of tax computations across different jurisdictions. The pre-tax rate is then used to discount pre-tax cash flows.

Financing cash flows: interest payments, dividends, and debt repayments are excluded. The cost of financing is captured in the discount rate, not in the cash flows themselves.

The Discount Rate for VIU

IAS 36 requires a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

The discount rate is typically derived from the weighted average cost of capital (WACC) of the entity or the specific business being valued, adjusted for asset-specific risks and converted to a pre-tax basis. For Indian entities, the WACC incorporates the risk-free rate (approximately the yield on 10-year Indian government securities, around 6.5-7% in mid-2026), an equity risk premium for Indian markets, a beta reflecting the industry's systematic risk, and the cost of debt.

A manufacturing CGU with stable cash flows might use a discount rate of 12-15%. A mining or commodity CGU with higher price volatility and operational risk might use 16-20%. Getting the discount rate wrong is the most consequential single error in a VIU calculation.

VIU vs FVLCD: Which to Use?

The choice depends on practical availability and which produces the higher result.

Use FVLCD when: an active market or observable comparable transaction data exists for the asset. The asset is already held for sale (though IFRS 5 then takes precedence). A market participant might value the asset differently from how it is being used internally (synergies in use exceed what any buyer would pay, but the disposal value is higher than carrying amount).

Use VIU when: no active market exists and FVLCD cannot be reliably estimated. The entity's use of the asset is likely to generate more value than any market transaction (entity-specific synergies exceed what a market participant would pay). VIU is more appropriate when the entity intends to keep using the asset and has unique advantages from its use.

For most Indian manufacturing and infrastructure assets, VIU is the primary approach because FVLCD for specialised factories, pipelines, or power plants is difficult to establish without a comparable transaction. For investment property and financial assets (where IAS 36 applies), FVLCD is typically more reliable.

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Worked Example: IAS 36 Impairment Test

Vedanta Resources holds a copper mine in India. At 31 March 2025, internal reports indicate production volumes are 20% below the original feasibility projections due to ore grade deterioration. Management performs an impairment test.

Asset details:

Carrying amount of mine assets: Rs. 4,200 crore

Remaining useful life: 15 years

Pre-tax discount rate: 14%

VIU calculation:

Management prepares a 15-year cash flow forecast. Key assumptions: copper output declining from 90,000 tonnes per year to 70,000 tonnes by Year 10 (reflecting ore grade deterioration), copper price of USD 9,000 per tonne in real terms (current market), operating costs at Rs. 45,000 per tonne in today's terms, escalating at 4% per annum, terminal value at end of Year 15 reflecting residual land value.

Simplified summary for illustration:

FVLCD assessment:

No active transaction market exists for copper mines of this size in India. An indicative offer was received from a mining company at Rs. 2,400 crore. Estimated costs of disposal (legal, brokerage): Rs. 60 crore. FVLCD: Rs. 2,400 – Rs. 60 = Rs. 2,340 crore.

Recoverable amount: Higher of VIU (Rs. 2,116 crore) and FVLCD (Rs. 2,340 crore) = Rs. 2,340 crore.

Impairment loss: Rs. 4,200 – Rs. 2,340 = Rs. 1,860 crore, recognised in profit or loss.

The impairment loss reduces the carrying amount of the mine assets from Rs. 4,200 crore to Rs. 2,340 crore. Subsequent depreciation and depletion is calculated on the revised carrying amount over the remaining useful life.

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Recognition and Allocation of Impairment Losses

When an impairment loss is identified for an individual asset (not a CGU), it is recognised immediately in profit or loss, reducing the carrying amount of that specific asset.

For a revalued asset (one measured under IAS 16's revaluation model), the impairment loss is treated as a revaluation decrease: first absorbed against any existing revaluation surplus for that specific asset in OCI, with any excess recognised in profit or loss.

The distinction matters: an impairment loss on a cost-model asset goes entirely to profit or loss; an impairment loss on a revalued asset first absorbs the OCI surplus before affecting profit or loss.

For CGUs (covered in depth in Post 40), the impairment loss is allocated across assets in a specific order, with goodwill absorbing the first loss.

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Reversal of Impairment Losses

If, at a later reporting date, the circumstances that caused the impairment have reversed, the impairment loss may be reversed, subject to strict limits.

For assets other than goodwill:

The reversal is the amount needed to restore the carrying amount to what it would have been (net of depreciation) had the impairment never been recognised. The reversal cannot take the carrying amount above the depreciated historical cost.

The reversal is recognised in profit or loss for cost-model assets, or in OCI (as a revaluation surplus) for revalued assets.

For goodwill:

Impairment losses on goodwill are never reversed. Reversing a goodwill impairment would be economically equivalent to recognising internally generated goodwill, which IAS 38 prohibits. The prohibition is absolute.

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Disclosure Requirements

IAS 36 requires significant disclosures for impaired assets, particularly when recoverable amount is based on VIU or FVLCD using unobservable inputs.

For each material impairment loss or reversal: the events or circumstances that led to it, the amount recognised, the nature of the asset or CGU, whether recoverable amount is FVLCD or VIU, and the discount rate used (for VIU).

For CGUs containing goodwill or indefinite-life intangibles: a description of the key assumptions on which management based the VIU or FVLCD calculation, the approach to determining the value assigned to each key assumption, the period over which cash flows were projected, and a sensitivity analysis showing the change in recoverable amount if a key assumption changes by a reasonably possible amount.

The sensitivity disclosure is the most operationally demanding. It requires management to quantify: "if our copper price assumption were USD 500 per tonne lower, the VIU would fall by Rs. X crore, resulting in an impairment of Rs. Y crore." For Indian mining, cement, and steel companies, these sensitivity disclosures reveal the margin of safety in the impairment test.

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Ind AS 36 vs IAS 36: Key Differences

The IASB exposure draft on Business Combinations Disclosures, Goodwill and Impairment proposes enhanced disclosures about acquisition performance and the sensitivity of goodwill impairment tests. If finalised in its current form, it would require Indian companies to disclose more granular information about whether acquisitions have delivered expected benefits and how close goodwill-carrying CGUs are to impairment thresholds.

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What Big 4 Auditors Focus On

Indicator assessment completeness. Auditors test whether management has identified all relevant indicators, both external and internal. An entity operating in a sector with market cap below book value, or with actual performance materially below budget, that concludes no impairment test is required is almost always wrong. The existence of an indicator triggers a test; only the test result determines whether impairment exists.

VIU discount rate derivation. Auditors engage valuation specialists to independently assess the pre-tax discount rate. Common errors include using a post-tax WACC without grossing up for tax, using a rate derived from a different sector, or using an entity's own cost of capital when assets are being tested individually using FVLCD assumptions.

Cash flow forecast reliability. Auditors test whether the cash flow forecasts used in VIU have been approved by appropriate management, are consistent with the entity's most recent budgets and plans, and whether prior-year forecasts predicted actual outcomes reasonably. Consistently optimistic forecasts that are not achieved reduce the credibility of current-year projections.

Exclusion of non-permitted items from VIU. Auditors verify that restructuring cash flows (not yet committed), enhancement capex (not yet committed), and financing cash flows have been excluded from VIU. Including these overstates VIU and reduces impairment losses that should be recognised.

FVLCD for assets with observable market data. Where market data exists (real estate comparable transactions, listed business valuations), auditors test whether FVLCD has been calculated using that data and whether the costs of disposal are complete and reasonable.

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Dip IFRS Exam Angle

IAS 36 is examined both conceptually (identify indicators, explain the two measures of recoverable amount) and through calculation (compute VIU given cash flows and discount rate, calculate the impairment loss).

Most tested areas:

Identifying indicators: given a scenario describing economic, operational, and market conditions, identify which are impairment indicators under IAS 36. Know both external and internal categories.

VIU vs FVLCD: given both calculations, select the higher as recoverable amount. Know when each is more appropriate. Know that only one calculation is required if it already exceeds carrying amount.

Impairment loss calculation: recoverable amount subtracted from carrying amount. Know it goes to profit or loss immediately (or OCI first for revalued assets).

Reversal: know the depreciated historical cost ceiling on reversal. Know that goodwill impairment is never reversed.

Common traps:

Using the lower of VIU and FVLCD as recoverable amount. It is the higher. The higher represents the best economic outcome.

Including future restructuring cash flows in VIU. Excluded unless restructuring is already committed and costs recognised as a liability.

Reversing goodwill impairment. Never permitted. This is among the most commonly examined one-sentence rules in Dip IFRS.

Applying the VIU calculation on a post-tax basis. IAS 36 requires pre-tax cash flows discounted at a pre-tax rate. Both the numerator and denominator are pre-tax.

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FAQ

Does IAS 36 apply to right-of-use assets?

Yes. ROU assets under IFRS 16 are within IAS 36's scope and must be tested for impairment when indicators exist. The VIU or FVLCD of the underlying asset (or the CGU to which the ROU asset belongs) determines the recoverable amount.

Can an entity avoid an impairment test if one of the two measures clearly exceeds carrying amount?

Yes. If FVLCD alone exceeds the carrying amount, no impairment exists and VIU need not be calculated. Conversely, if VIU exceeds carrying amount, FVLCD need not be calculated. Only one measure is needed to confirm no impairment.

What is the relationship between IAS 36 and IFRS 3 goodwill?

Goodwill arising on business combinations is not amortised under IFRS 3. Instead, it is tested annually for impairment under IAS 36 at the CGU level. An impairment loss on goodwill is recognised in profit or loss and cannot be reversed. This is the primary ongoing accounting consequence of recognising goodwill in a business combination.

How does a market capitalisation shortfall trigger IAS 36 testing?

If total market capitalisation falls below the carrying amount of net assets, it is an external indicator under IAS 36. It does not automatically mean all assets are impaired; it signals that the market assigns less value to the business than the books reflect. The entity must then assess which CGUs may be impaired and perform impairment tests on those.

Is a VIU calculation required for every asset individually?

No. Many assets cannot generate cash flows independently. For those assets, IAS 36 requires grouping them into cash-generating units (CGUs), the smallest identifiable group of assets that generates largely independent cash inflows. The impairment test is then performed at the CGU level. Post 40 covers CGU identification in detail.

Can climate risk alone trigger an impairment loss?

Climate risk can trigger the requirement to perform an impairment test (as an indicator), but whether it results in an impairment loss depends on the test outcome. An entity with stranded fossil fuel assets where the VIU and FVLCD both fall below carrying amount would recognise an impairment loss. Climate risk is increasingly a material input into both the cash flow forecasts and the discount rate used in VIU calculations.

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This is Post 39 of the Global Fin X IFRS Series. Previous: IFRS 5: Non-Current Assets Held for Sale and Discontinued Operations. Next: Post 40: IAS 36 CGUs, Goodwill Allocation, Impairment Testing and Reversal.