Impairment of Assets Under Ind AS 36

Both financial reporting and business valuation exist to answer the same underlying question: is an asset actually worth what the books say it's worth. Ind AS 36 is the standard that makes this question mandatory. It requires companies to test at once every year, whether the carrying value of their assets still matches the real value. This ensures that the numbers, in the statements are accurate and reflect the current situation. Companies must look closely at their assets. Decide if any are overvalued. If so they need to adjust the value. This process helps keep the books honest and reliable. Getting the test wrong is a common, and often invisible, source of an overstated balance sheet.

The Core Rule: Carrying Value Cannot Exceed Recoverable Amount

Ind AS 36 requires that no asset be carried in the books at more than its recoverable amount. Where the carrying amount exceeds it, the shortfall is an impairment loss, recognised immediately in the Statement of Profit and Loss. The standard covers property, plant and equipment intangible assets, goodwill and equity‑accounted investments. Inventories, assets under Ind, AS 109 and deferred tax assets are governed by separate rules and are not part of the scope of the standard.

Recoverable Amount: Two Ways of Answering the Same Question

Recoverable amount is the higher of two distinct measures, each answering "what is this asset actually worth" from a different angle:

• Fair value less costs of disposal (FVLCD) — what the asset would fetch in an arm's-length sale today, net of the costs of selling it.
• Value in use (VIU) — the present value of the future cash flows the asset, or the Cash-Generating Unit it belongs to, is expected to generate if it continues to be used rather than sold.

FVLCD asks what a buyer would pay now. VIU asks what the asset is worth to the business that already owns it.The two can diverge significantly. A specialised piece of equipment may have little resale value yet still produce substantial cash flow, in its current use or the reverse can happen. Which one ends up governing the recoverable amount says something about the asset itself, not just the arithmetic.

Why Value in Use Is Where Most Disputes Happen

VIU is, at its core, a discounted cash flow exercise. It involves projected cash flows. It uses a discount rate that reflects the risk of the asset. It also includes a terminal value assumption. That assumption must be consistent, with the long-term outlook of the entity. Unlike FVLCD, which is anchored to an external market, VIU is built entirely from management's own assumptions. That makes it the figure auditors and regulators scrutinise most closely, since it's also the figure most exposed to optimism bias — a growth rate nudged slightly higher, or a discount rate nudged slightly lower, can be the difference between an impairment and a clean pass.

Cash-Generating Units: Where Individual Assets Stop Making Sense

Very few assets generate cash flows on their own. A single machine on a factory floor, a distribution network, or acquired goodwill only produces value as part of a larger unit. Ind AS 36 therefore requires testing at the Cash-Generating Unit (CGU) level. The smallest group of assets that generates cash inflows largely independent of other assets. Defining CGU boundaries correctly, and allocating goodwill across them in a way that's consistent with how the business is actually managed, is frequently the most contested part of an impairment review, particularly after an acquisition.

When the Test Is Required

Companies assess impairment indicators at every reporting date .External triggers such as adverse market conditions, technological obsolescence, or a market capitalisation falling below net assets, and internal triggers such as idle capacity, physical damage, or cash flows consistently missing budget. Goodwill and indefinite-life intangibles are the exception: they require testing every year regardless of whether any trigger exists at all.

Once impairment is confirmed, carrying value is written down to the recoverable amount, the loss is charged to the P&L, and future depreciation is recalculated on the reduced base. The loss might be fixed later if things get better. But not for goodwill, where you can never undo it which is a choice made on purpose, in the rules.

The choice between FVLCD and VIU, and the definition of the CGU being tested, should follow from the actual economics of the asset being reviewed and not from whichever number happens to avoid a write-down. A defensible VIU model with transparent, benchmarked assumptions is worth more to a CFO facing an audit than a favourable number that can't survive scrutiny.