International Accounting Standard 36

International Accounting Standard 36 (IAS 36), titled Impairment of Assets, is an International Accounting Standards (IAS) issued by the International Accounting Standards Board (IASB) that prescribes the procedures an entity must apply to ensure that its assets are carried at no more than their recoverable amount. The standard establishes principles for identifying, measuring, recognizing, reversing, and disclosing impairment losses relating to non-financial assets. IAS 36 is a core standard within the International Financial Reporting Standards (IFRS) framework and seeks to ensure that assets are not reported in financial statements at amounts exceeding the economic benefits expected to be recovered through their use or disposal.

History

IAS 36 was originally issued by the International Accounting Standards Committee (IASC) in June 1998 to establish a comprehensive framework for impairment accounting.

Following the establishment of the International Accounting Standards Board (IASB) in 2001, responsibility for IAS 36 was transferred to the IASB. The standard has subsequently been amended on several occasions to align with developments in IFRS, including the introduction of International Financial Reporting Standard 3 (Business Combinations), International Financial Reporting Standard 5 (Non-current Assets Held for Sale and Discontinued Operations), and other related standards.

Objective

The objective of IAS 36 is to ensure that assets are carried at no more than their recoverable amount.

The standard establishes principles for:

identifying impairment indicators;
measuring recoverable amount;
recognizing impairment losses;
reversing impairment losses where appropriate;
disclosing impairment-related information.

These requirements improve the reliability and comparability of financial reporting.

Scope

IAS 36 applies to most non-financial assets, including:

property, plant and equipment;
intangible assets;
goodwill;
investments in subsidiaries carried at cost;
investments in associates carried at cost;
investments in joint ventures carried at cost.

The standard does not apply to certain assets accounted for under other IFRS standards, including:

inventory;
deferred tax assets;
employee benefit assets;
financial assets;
investment property measured at fair value;
biological assets measured at fair value less costs to sell.

Impairment

An asset is impaired when its carrying amount exceeds its recoverable amount.

Indicators of impairment may include:

significant decline in market value;
adverse technological changes;
economic or legal changes;
physical damage;
deterioration in operating performance;
increases in market interest rates.

Entities are required to assess at each reporting date whether such indicators exist.

Recoverable amount

Recoverable amount is defined as the higher of:

fair value less costs of disposal; and
value in use.

This relationship may be expressed as:

$R e c o v e r a b l e A m o u n t = max (F a i r V a l u e L e s s C o s t s o f D i s p o s a l, V a l u e i n U s e)$

Where the carrying amount exceeds the recoverable amount, an impairment loss is recognized.

Value in use

Value in use represents the present value of the future cash flows expected to be derived from an asset or cash-generating unit.

Its calculation generally requires:

estimates of future cash flows;
expectations regarding asset usage;
an appropriate pre-tax discount rate reflecting current market assessments of the time value of money and asset-specific risks.

Cash-generating units

Where the recoverable amount of an individual asset cannot be determined independently, IAS 36 requires impairment testing at the level of a cash-generating unit (CGU).

A CGU is the smallest identifiable group of assets that generates cash inflows largely independent of other assets or asset groups.

Goodwill impairment

Goodwill acquired in a business combination is not amortized under IFRS.

Instead, IAS 36 requires goodwill to be:

allocated to relevant cash-generating units; and
tested for impairment at least annually or more frequently if impairment indicators exist.

Impairment losses recognized for goodwill cannot subsequently be reversed.

Recognition and reversal

When an impairment loss is identified, the carrying amount of the asset is reduced to its recoverable amount.

For most assets, impairment losses may subsequently be reversed if estimates used to determine recoverable amount change.

However, impairment losses relating to goodwill cannot be reversed under IAS 36.

Disclosure requirements

IAS 36 requires entities to disclose information including:

impairment losses recognized;
impairment reversals;
events leading to impairment;
recoverable amount determination;
discount rates used;
assumptions supporting value-in-use calculations;
allocation of goodwill to cash-generating units.

These disclosures enhance transparency regarding impairment assessments.

Relationship with other IFRS standards

IAS 36 operates alongside several other IFRS standards governing asset accounting.

Standard	Primary subject
International Accounting Standard 1	Presentation of financial statements
International Accounting Standard 2	Inventory
International Accounting Standard 16	Property, plant and equipment
International Accounting Standard 36	Impairment of assets
International Financial Reporting Standard 3	Business combinations

These standards collectively govern the recognition, measurement, and presentation of assets under IFRS.

Importance

IAS 36 contributes to financial reporting by:

preventing overstatement of asset values;
improving measurement of recoverable amounts;
enhancing transparency;
supporting reliable financial analysis;
improving comparability among entities.

It plays a central role in ensuring that assets are reported at amounts expected to generate future economic benefits.

Impact

International Accounting Standard 36 established a comprehensive framework for impairment accounting under IFRS by requiring entities to recognize losses when assets are no longer expected to recover their carrying amounts. The standard enhances the reliability, comparability, and transparency of financial reporting by ensuring that assets are measured at recoverable amounts. IAS 36 is particularly significant for asset-intensive industries and for entities with substantial goodwill arising from business combinations, making it an important component of modern financial accounting and corporate reporting.