Ind AS 36 prescribes the procedures an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is impaired when its carrying amount exceeds the amount that can be recovered through its use or sale; in that case an impairment loss is recognised. The standard is closely aligned with AS 28, with the most significant differences concerning goodwill — which, because Ind AS does not amortise it, must be tested for impairment at least annually and can never be reversed.
Objective and scope
The objective is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount, and to prescribe when to recognise or reverse an impairment loss and the related disclosures. The standard applies to a broad range of assets but excludes those covered by other standards where impairment or valuation is already addressed — for example, inventories (Ind AS 2), assets arising from contracts with customers and construction (Ind AS 115), deferred tax assets (Ind AS 12), financial assets within Ind AS 109 (which has its own impairment model), and investment property measured at fair value (Ind AS 40).
Identifying a possible impairment
At the end of each reporting period, an entity assesses whether there is any indication that an asset may be impaired; if so, it estimates the asset's recoverable amount. The entity considers external sources (a significant decline in market value; adverse changes in the technological, market, economic, or legal environment; increases in market interest rates; the carrying amount of net assets exceeding market capitalisation) and internal sources (obsolescence or physical damage; adverse changes in the extent or manner of use; internal evidence that the asset's economic performance is or will be worse than expected).
Irrespective of any indication, an entity is required to test the following for impairment at least annually: an intangible asset with an indefinite useful life; an intangible asset not yet available for use; and goodwill acquired in a business combination. This mandatory annual test for goodwill and indefinite-life intangibles is a key feature that distinguishes Ind AS 36 from AS 28.
Recoverable amount, value in use, and fair value less costs of disposal
The recoverable amount of an asset (or cash-generating unit) is the higher of its fair value less costs of disposal and its value in use.
Fair value less costs of disposal is the price that would be received to sell the asset in an orderly transaction between market participants (fair value under Ind AS 113), less the incremental costs directly attributable to the disposal.
Value in use is the present value of the future cash flows expected to be derived from the asset or cash-generating unit — estimating the future cash inflows and outflows from continuing use and ultimate disposal, and applying a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
Taking the higher of the two reflects that a rational entity would recover an asset's value by whichever route yields more.
Recognising an impairment loss and cash-generating units
If, and only if, the recoverable amount is less than the carrying amount, the carrying amount is reduced to the recoverable amount and the reduction is an impairment loss, recognised immediately in profit or loss (unless the asset is carried at a revalued amount, in which case the loss is treated as a revaluation decrease). After recognition, depreciation is adjusted to allocate the revised carrying amount over the remaining useful life.
Where it is not possible to estimate the recoverable amount of an individual asset, the entity determines the recoverable amount of the cash-generating unit (CGU) to which the asset belongs — the smallest identifiable group of assets that generates cash inflows largely independent of those from other assets. Goodwill acquired in a business combination is allocated to the CGUs (or groups of CGUs) expected to benefit from the combination, and those units are tested annually. An impairment loss for a CGU is allocated first to reduce any goodwill allocated to the unit, and then to the other assets pro rata on the basis of their carrying amounts, subject to not reducing any asset below its own recoverable amount.
Reversal of impairment losses
At the end of each reporting period, an entity assesses whether there is any indication that a previously recognised impairment loss (for assets other than goodwill) may no longer exist or may have decreased; if so, it estimates the recoverable amount and reverses the impairment loss to the extent the recoverable amount has increased due to a change in estimates, but not above the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised previously. A reversal is recognised in profit or loss (or as a revaluation increase). Critically, an impairment loss recognised for goodwill is never reversed — this prohibition is a defining Ind AS 36 rule.
Disclosure
Disclosures include, for each class of assets, the impairment losses and reversals recognised in profit or loss (and in OCI for revalued assets) during the period and the line items affected. Extensive additional disclosures apply to goodwill and indefinite-life intangibles allocated to CGUs — including the carrying amounts allocated, the basis on which recoverable amount was determined (value in use or fair value less costs of disposal), the key assumptions and discount rates used, and sensitivity information where a reasonably possible change in a key assumption would cause impairment.
A brief illustration
A company owns a machine carried at ₹80 lakh. New technology renders its product less competitive (an external indication), so the company estimates recoverable amount: fair value less costs of disposal is ₹50 lakh, and value in use is ₹55 lakh. Recoverable amount is the higher, ₹55 lakh; since this is below ₹80 lakh, a ₹25 lakh impairment loss is recognised and the machine is written down to ₹55 lakh. Separately, the company carries goodwill from an acquisition allocated to a CGU; regardless of any indication, it tests that goodwill for impairment annually, and if the CGU's recoverable amount is below its carrying amount, the loss reduces the goodwill first. If, later, conditions improve, the machine's impairment could be reversed (up to its notional carrying amount), but any goodwill impairment could never be reversed.
How Ind AS 36 compares with AS 28
Ind AS 36 and AS 28 are closely aligned — the same core rule (carry assets at no more than recoverable amount), recoverable amount as the higher of value in use and a market-based sale value, the use of cash-generating units, and the ability to reverse impairment losses on assets other than goodwill. The differences flow from the Ind AS framework. Under Ind AS 36, goodwill (not amortised under Ind AS 103) and indefinite-life intangibles must be tested for impairment at least annually, regardless of indications; and impairment of goodwill can never be reversed. Ind AS 36 uses fair value less costs of disposal (aligned with Ind AS 113) in place of AS 28's "net selling price". The AS framework's treatment of goodwill differs because it amortises goodwill. For most individual operating assets, however, the impairment mechanics under the two standards are substantially the same.
Common pitfalls
Recurring issues include failing to assess for indications of impairment at each reporting date, or to perform the mandatory annual test for goodwill and indefinite-life intangibles; testing an individual asset in isolation when it does not generate independent cash flows (a CGU test is needed); using an inappropriate discount rate or over-optimistic cash flows in value in use; reversing goodwill impairment (never permitted) or reversing other impairments above the notional carrying amount; and omitting the extensive goodwill/CGU disclosures.
Why this is cleaner on a unified system
Impairment testing requires reliable carrying amounts and the cash flow information needed to estimate value in use — far easier when the fixed asset register, the operational data driving cash flow projections, and the ledger sit in one connected system. When carrying amounts and the data behind recoverable-amount estimates come from a single source of truth, identifying indications of impairment, testing at the asset or CGU level (including the annual goodwill test), and recognising or reversing impairment losses is more reliable than reconciling asset records and projections held in separate tools.
This article is a detailed educational summary of Ind AS 36 in plain language. It is not a substitute for the full text of the standard. Accounting standards are amended from time to time; always verify the current, authoritative text of Ind AS 36 as notified under the Companies Act before relying on it, and consult a qualified chartered accountant for application to your specific circumstances.