Testing a client's assets for impairment
When IAS 36 requires an impairment test, how recoverable amount is compared with carrying amount, and how to book and disclose a loss in the Studio.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Depreciation spreads an asset's cost over its life on the assumption that the asset will earn its keep. Impairment is the check on that assumption. When a bakery's second branch closes, when a quarry's crusher stands idle for most of the year, or when a printing firm's main contract goes to a competitor, the statement of financial position may still show those assets at a figure the business will never get back.
IAS 36 is the standard that catches this. For most small clients the impairment question is answered quickly, but it has to be asked, and the answer has to be recorded. This article covers when a test is required, how the comparison works, and how to book and disclose a loss.
The core principle: not above what can be recovered
The IFRS Foundation states that the core principle in IAS 36 is that an asset must not be carried in the financial statements at more than the highest amount to be recovered through its use or sale. IAS 36 calls that figure the recoverable amount. If the carrying amount exceeds the recoverable amount, the asset is impaired: the entity reduces the carrying amount to the recoverable amount and recognises an impairment loss.
The two routes in that principle, use and sale, are worth keeping apart in the working papers. One estimate looks at what the client could get by continuing to use the asset; the other at what it could get by selling it. The recoverable amount is the higher of the two, because a rational owner would take whichever route recovers more. Only if both fall below the carrying amount is there a loss.
Annual tests versus tests on indication
Under IAS 36, three kinds of asset must have their recoverable amount assessed each year: intangible assets with indefinite useful lives, intangible assets not yet available for use, and goodwill acquired in a business combination. For a small client these are uncommon but not rare. Goodwill from buying a competitor's practice or a franchise territory falls here, as does software still under development at year end.
For every other asset within the standard, IAS 36 states that the recoverable amount is assessed only when there is an indication that the asset may be impaired. In practice, the preparer looks for evidence such as:
- an asset idle, damaged or no longer used as planned;
- a branch, product line or contract that has been lost or closed;
- a sharp fall in the market for what the asset produces;
- losses or cash shortfalls in the part of the business that uses the asset.
Ask the client directly at year end, and record the answer. A file that says "no indicators identified, discussed with the managing director on a stated date" is far stronger than silence.
Assets IAS 36 does not cover
IAS 36 does not apply to assets whose impairment other standards address. The IFRS Foundation lists inventories, deferred tax assets, assets arising from employee benefits, financial assets within the scope of IFRS 9, investment property measured at fair value, biological assets within the scope of IAS 41, some assets arising from insurance contracts, and non-current assets held for sale.
This list prevents a common muddle. A write-down of slow-moving stock is a net realisable value question under the inventory standard, not an IAS 36 impairment. An allowance against a doubtful receivable is an IFRS 9 matter. Keep each in its own working paper and its own note, so the reader sees each judgement under the right heading.
Cash-generating units and reversals
Many assets do not produce cash on their own. A delivery van earns nothing in isolation; the whole branch does. IAS 36 deals with this through the cash-generating unit, described as the smallest group of assets that generates independent cash flows. Where an individual asset's recoverable amount cannot be assessed on its own, the test is run on the unit it belongs to.
When an impairment loss is recognised for a cash-generating unit, IAS 36 reduces goodwill first and then the other assets of the unit pro rata. The loss is recognised immediately in profit or loss, or in comprehensive income where it is a revaluation decrease under IAS 16 or IAS 38.
Reversals follow their own rules. An impairment loss on goodwill is never reversed. For other assets, when the circumstances that caused the loss are favourably resolved, the loss is reversed, but the carrying amount is not increased above the amount it would have been without the earlier impairment. Keep last year's impairment workings on file for that reason: next year's reversal test depends on them.
Booking the loss and completing the note
A worked example in words. A client's second bakery branch closes in the last quarter. The ovens and fit-out cannot be moved economically, and the landlord's offer for them is the best realistic sale price. Their value in continued use is negligible because the branch has stopped trading. The preparer records the indication, estimates both routes, concludes that the recoverable amount is the sale offer, and writes the assets down to it.
In Achekam, the write-down is posted as a year-end adjusting entry in the Studio. Achekam does not calculate depreciation; it presents the depreciation in the trial balance and flags when the charge does not agree with the movement in accumulated depreciation. If the impairment is credited to the same accumulated depreciation account, that account's movement will no longer match the depreciation charge, which is exactly the difference the Studio flags. Use a separate accumulated impairment account so the flag keeps its meaning. If an entry later proves wrong, it is reversed with a record of who did it and why, not deleted.
The property, plant and equipment note then shows the loss as its own movement, as covered in the property, plant and equipment note. Notes take their figures from the mapped trial balance, and facts the trial balance does not hold are left as "[to be completed]". The narrative of what happened, which assets were affected and how the recoverable amount was estimated is that kind of fact, so the preparer writes it. Intangibles follow the same logic, with the amortisation side covered in amortising intangible assets.
The IFRS Foundation's IAS 36 page explains the principle that an asset must not be carried above its recoverable amount and how a loss is recognised when it is. Add one line to every year-end questionnaire, asking whether any asset is idle, damaged or no longer used as planned, and the indications will find their way to you.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
