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Impairment means decrease. According to prudence concept we cannot overstate the asset value. And in order to ensure that amount is prudent we can use a test called impairment test.

This standard sets out that when the carrying value of an asset in the FS is greater than its recoverable amount (company can recover money from the asset at the end of its useful life) then the carrying value is reduced to its recoverable amount. (choose the lower amount).

Reduction in carrying value is called impairment loss. Defined by IAS 36:

The amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount.

The question is when do we do the impairment test and how can we do that?


  1. Indication of impairment at the reporting date
  1. Internal:

    • Asset obsolete or damage;
    • Operating losses for the current period;
    • Loss of key employees;
    • Reconstructions.


    • Adverse change in the commercial environment(decrease demand for the asset)
  1. Test annually for certain assets:
    • Intangible assets with an infinite useful life;
    • Goodwill acquired in a business combination.


    1. Steps for individual asset:


      Step1: Compare CV with RV*(higher-step2)

      Step2: Take the higher of VIU*(future cashflow discounted) and NRV(price-cost to sell)

      Step3: CV-RV=impairment loss

      *RV=recoverable amount:how much money can I get if I’m going to sell it(NRV) or use it(VIU).

      *VIU=value in use(using this asset then it will generate into future cash flow)

      And in the real practice this is from the most recent budget and a maximum of 5 years.


    3. Accounting entries:
    4. Asset at historical cost Revalued asset
      DR I/S

      CR NCA

      DR revaluation reserve

      DR I/S(balancing figure with any excess impairment)

      CR NCA


    5. Impairment for cash generating units (CGU)
    6. What CGU actually means is that we cannot estimate how much cash flow that a component can generate but if we were to put all these components all together then they will generate into cash flows.

      The steps to measure impairment in CGU:

      Step1: Specific assets

      Step2: Goodwill

      Step3: Remaining

      Note: we can’t allocate impairment expenses to montary assets such as cash, receivable and payables.