Impairment of assets

Depreciation spreads cost over an asset's life; it doesn't guarantee the carrying amount is recoverable. IAS 36 makes sure assets — PPE, right-of-use assets, intangibles, goodwill — aren't carried at more than they can recover.

Step 1: look for indicators (IAS 36.12). At each reporting date, assess whether there's any indication of impairment. - External: a significant fall in the asset's market value; adverse changes in technology, markets, the economy or the law; higher market interest rates (which reduce value in use); the entity's net assets exceeding its market capitalisation. - Internal: obsolescence or physical damage; the asset becoming idle, or plans to restructure or dispose of it; evidence from internal reports that performance is worse than expected. Only if there's an indicator is recoverable amount estimated — except goodwill, indefinite-life intangibles and intangibles not yet available for use, which are tested every year.

Step 2: measure recoverable amount — the higher of: - Fair value less costs of disposal (FVLCOD): the price in an orderly sale to market participants, less incremental disposal costs; and - Value in use (VIU): the present value of the future cash flows expected from the asset in its current condition, discounted at a pre-tax rate reflecting the time value of money and the asset's risks. Using the higher figure reflects the fact that management can either keep using the asset or sell it. If one figure already exceeds the carrying amount, there's no impairment and the other needn't be calculated.

Step 3: recognise the loss. If carrying amount > recoverable amount, write the asset down and recognise an impairment loss in profit or loss (or against any revaluation surplus for a revalued asset). Future depreciation is then based on the new carrying amount over the remaining life.

Where an asset doesn't generate independent cash inflows, the test is done for its cash-generating unit (CGU) — the smallest group of assets that does. A CGU loss reduces any goodwill first, then the other assets pro rata.

Reversal. If the estimates used to determine recoverable amount change favourably, the loss is reversed — but the carrying amount can't exceed what it would have been (net of depreciation) had no impairment been recognised. Goodwill impairment is never reversed.

US GAAP (ASC 360) differs for long-lived assets held and used: first a recoverability test compares the carrying amount with undiscounted future cash flows; only if they're lower is a loss measured, as carrying amount minus fair value. Reversals of impairment are prohibited. So an asset can be impaired under IFRS but not under US GAAP.