What Is Impairment Testing?
Impairment testing checks whether an asset's carrying amount on the balance sheet exceeds what it could actually generate or fetch in the market. If it does, the asset is written down to its recoverable amount — and in some cases, that write-down can later be reversed.
An asset is impaired when its carrying amount exceeds its recoverable amount (the higher of fair value less costs of disposal and value in use); the impairment loss is the difference, and it may be reversed later if the recoverable amount improves — except for goodwill, which can never be reversed.
- 1.Watch for indicators — At each reporting date, assess for signs of impairment (or test annually for goodwill and indefinite-life intangibles).
- 2.Estimate recoverable amount — Calculate the higher of fair value less costs of disposal and value in use.
- 3.Recognize the loss — If carrying amount exceeds recoverable amount, write the asset down and expense the difference.
- 4.Reassess later — At the next reporting date, check whether the recoverable amount has recovered (goodwill excluded) and reverse if so.
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Step-by-step worked examples
A machine has a carrying amount of $500,000. Its fair value less costs of disposal is $410,000 and its value in use is $420,000. What is the impairment loss?
Recoverable amount = higher of FVLCD and VIU = max(410,000, 420,000) = $420,000 Impairment loss = Carrying amount − Recoverable amount = 500,000 − 420,000 = $80,000
A building has a carrying amount of $1,200,000. Its fair value less costs of disposal is $1,150,000 and its value in use is $1,300,000. Is there an impairment?
Recoverable amount = max(1,150,000, 1,300,000) = $1,300,000 Since recoverable amount ($1,300,000) exceeds carrying amount ($1,200,000), no impairment is recognized
Equipment was impaired last year from a carrying amount of $300,000 down to a recoverable amount of $250,000 (a $50,000 loss). This year its recoverable amount has recovered to $290,000, and the carrying amount would have been $295,000 if no impairment had ever been recognized (after normal depreciation). How much reversal is recognized?
Uncapped reversal = 290,000 − 250,000 = $40,000 Cap = depreciated carrying amount without the original impairment = $295,000 Since 250,000 + 40,000 = $290,000 is below the $295,000 cap, the full $40,000 reversal is recognized
Flashcards
Quick quiz
Q1.An asset is impaired when...?
Q2.Carrying amount = $500,000, FVLCD = $410,000, VIU = $420,000. What is the impairment loss?
Q3.Which type of impairment loss can never be reversed?
Q4.What is recoverable amount?
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Common mistakes
Using only fair value to determine recoverable amount. — Correct: Recoverable amount is the higher of fair value less costs of disposal and value in use — both must be considered.
Reversing a goodwill impairment when the recoverable amount improves. — Correct: Goodwill impairment losses are never reversed under IAS 36 (or ASC 350).
Reversing an impairment above what the carrying amount would have been without it. — Correct: Reversals are capped at the depreciated carrying amount the asset would have had if no impairment had ever been recognized.
Testing every asset for impairment individually even when it generates no independent cash flows. — Correct: When an asset can't generate cash flows independently, it's tested as part of its cash-generating unit (CGU).
FAQ
What is impairment testing in accounting?
It's the process of checking whether an asset's carrying amount exceeds its recoverable amount, and writing the asset down to that recoverable amount if so.
How do you calculate an impairment loss?
Impairment loss = carrying amount − recoverable amount, where recoverable amount is the higher of fair value less costs of disposal and value in use.
Can an impairment loss be reversed?
Yes, for most assets, if the recoverable amount later improves — but the reversal is capped, and goodwill impairment can never be reversed.
What is the difference between fair value less costs of disposal and value in use?
Fair value less costs of disposal is what the asset could be sold for net of selling costs; value in use is the present value of cash flows from continuing to use it.