IAS 36 Impairment Notes: Value in Use, CGUs and Reversals [ACCA FR]

These IAS 36 impairment notes give you the complete impairment method for ACCA Financial Reporting (FR): how to decide an asset needs testing, how to measure recoverable amount, how to share a loss inside a cash-generating unit, and when a past loss can reverse. The core rule is one comparison. If carrying amount exceeds what the business can recover from the asset, through use or through sale, the asset is written down by the difference. Everything else in the standard is machinery for measuring that recoverable amount honestly.

According to ACCA, the pass rate for FR was 49% in the September 2026 session, and calculation-heavy standards are where prepared candidates gain ground. This note is part of our free ACCA notes library, and it assumes you know how goodwill arises on consolidation (see the ACCA FR consolidated statements note if not).

IAS 36 Impairment Notes: The Core Rule

IAS 36 impairment notes: 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 excess is charged to profit or loss, and a cash-generating unit allocates the loss to goodwill first.

IAS 36 exists to stop assets being carried at amounts the business will never recover. The standard covers property, plant and equipment, intangible assets, goodwill, right-of-use assets, and investments in subsidiaries, associates and joint ventures in separate financial statements. It does not cover inventories (IAS 2 uses net realizable value), deferred tax assets (IAS 12), or financial assets (IFRS 9 applies its expected credit loss model). When a question mixes asset types, the first mark often comes from sending each asset to the correct standard.

Where the loss lands depends on how the asset is carried. Under the cost model it goes straight to profit or loss. For a revalued asset, such as property under the IAS 16 revaluation model, it is a revaluation decrease: charged against any existing revaluation surplus for that asset in other comprehensive income first, with only the excess reaching profit or loss. After an impairment, the entity recalculates depreciation on the reduced carrying amount over the remaining useful life, a detail examiners love to test in the follow-up year of a two-part question.

When to Test: Indicators and the Annual Test

Most assets are tested only when there is an indication of impairment. At each reporting date the entity scans for the IAS 36.12 indicators, split into external and internal evidence.

External indicators	Internal indicators
Market value has fallen far more than expected from time or normal use	Evidence of obsolescence or physical damage
Significant adverse changes in the technological, market, economic or legal environment	Significant changes in use, including plans to discontinue or restructure the operation
Market interest rates have risen, raising the discount rate and reducing value in use	Plans to dispose of the asset earlier than previously expected
The carrying amount of the entity net assets is higher than its market capitalization	Internal reporting shows economic performance is, or will be, worse than expected

Three categories skip the indicator scan and are tested every year regardless: goodwill acquired in a business combination, intangible assets with an indefinite useful life, and intangible assets not yet available for use (IAS 36.10). A cash-generating unit carrying goodwill is also tested annually, at the same time each year (IAS 36.96). For example, an exam scenario that says “acquired three years ago and never tested since” next to a goodwill balance is a deliberate instruction to test now.

Measuring Recoverable Amount in IAS 36 Impairment Notes

Recoverable amount is the higher of two numbers (IAS 36.18): fair value less costs of disposal (FVLCD) and value in use (VIU). The logic is economic: a rational owner keeps whichever route recovers more, using the asset or selling it. You do not always need both figures. If either one exceeds the carrying amount, the asset is not impaired and the second calculation is unnecessary.

Fair Value and Value in Use: The Two Measures

Fair value follows IFRS 13. Costs of disposal are the incremental costs of the sale itself, such as legal fees, transaction taxes and dismantling costs; finance costs and income tax are excluded. Value in use is the present value of the future cash flows from continuing to use the asset, plus its disposal proceeds at the end of its useful life. IAS 36 sets strict rules for those cash flows:

Include in value in use	Exclude from value in use
Cash inflows from continuing use of the asset	Cash flows from a future restructuring the entity has not yet committed to
Cash outflows needed to generate those inflows, including servicing and allocated overheads	Capital expenditure that improves or enhances the asset beyond its originally assessed standard of performance
Net cash flows from disposal at the end of the useful life	Financing cash flows, both interest and capital repayments
Projections from the most recent approved budgets, maximum five years unless a longer period is justified	Income tax receipts and payments (the calculation is pre-tax)
A steady or declining growth rate to extrapolate beyond the budget period	An increasing long-term growth rate, unless it can be justified

The discount rate is a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the asset (IAS 36.55). Mixing a post-tax rate with pre-tax cash flows double-counts tax and understates value in use, one of the most common technical errors in student answers.

Worked Example 1: Value in Use Step by Step

A machine has a carrying amount of $500,000. Expected net cash inflows are $150,000 in year 1, $140,000 in year 2 and $120,000 in year 3, plus disposal proceeds of $30,000 at the end of year 3. The pre-tax discount rate is 10%, and fair value less costs of disposal is $390,000. Test the machine for impairment.

Year	Cash flow ($)	Discount factor at 10%	Present value ($)
1	150,000	0.909	136,364
2	140,000	0.826	115,702
3	150,000 (120,000 + 30,000 disposal)	0.751	112,697
Value in use			364,763

Recoverable amount is the higher of FVLCD ($390,000) and VIU ($364,763), so it is $390,000. The impairment loss is $500,000 less $390,000, which is $110,000, charged to profit or loss, and the machine then stands at $390,000 for its remaining three-year life. Notice the teaching point: value in use is not automatically the answer. Here the sale route recovers more, and a candidate who stops after the discounting table overstates the loss by $25,237.

Cash-Generating Units in IAS 36 Impairment Notes

Many assets cannot be tested alone. A single machine on a production line generates no cash inflows of its own; only the line or the factory sells anything. IAS 36 therefore tests the asset inside its cash-generating unit (CGU), the smallest identifiable group of assets that generates cash inflows largely independent of other assets (IAS 36.6). In practice, identifying the CGU is a judgement call in FR scenarios: in a chain of shops each shop is usually a CGU, while a vertically integrated plant is usually one CGU.

Goodwill generates no independent cash flows, so the entity allocates it to the CGUs, or groups of CGUs, expected to benefit from the combination that created it (IAS 36.80). Each unit is the lowest level at which management monitors goodwill, and cannot be larger than an operating segment. The CGU carrying amount in the test includes the allocated goodwill.

When a CGU is impaired, IAS 36.104 fixes the allocation order:

• First, goodwill. The loss reduces goodwill allocated to the unit, down to zero if necessary.
• Then, everything else pro rata. The entity then shares any remaining loss across the other assets in proportion to their carrying amounts.

One floor protects individual assets during the allocation (IAS 36.105). No asset may be written down below the highest of its own fair value less costs of disposal, its own value in use if measurable, and zero. If the pro rata share would breach that floor, the asset stops at the floor and the leftover loss is reallocated across the remaining assets. Where possible, the entity allocates corporate assets such as a head office to CGUs on a reasonable basis.

Worked Example 2: Allocating a CGU Loss in the Right Order

A CGU carries goodwill of $100,000, plant of $400,000 and equipment of $300,000: $800,000 in total. Its recoverable amount is $620,000. Allocate the loss.

Asset	Carrying amount ($)	Loss allocated ($)	New carrying amount ($)
Goodwill	100,000	100,000 (written off first)	0
Plant	400,000	45,714 (80,000 x 400/700)	354,286
Equipment	300,000	34,286 (80,000 x 300/700)	265,714
Total	800,000	180,000	620,000

The total loss is $180,000. Goodwill absorbs the first $100,000 and drops to zero. The remaining $80,000 is split between plant and equipment in the ratio of their carrying amounts, 400 to 300. Always run the closing check in the final column: after allocation, the unit must stand at exactly its recoverable amount, $620,000. If your total misses that figure, the allocation is wrong.

Reversals in IAS 36 Impairment Notes: What Can Come Back

However, impairment is not always permanent. At each reporting date the entity checks for indications that a past loss, other than goodwill, has decreased or no longer exists. The entity recognizes a reversal only when the estimates used to determine recoverable amount have changed since it booked the loss (IAS 36.110). The passage of time, which unwinds the discount and lifts value in use mechanically, is not a reason to reverse.

Two hard limits define this topic. First, the cap: after a reversal, the carrying amount cannot exceed what it would have been, net of depreciation, if no impairment had ever been recognized (IAS 36.117). A reversal cannot carry an asset above depreciated historical cost. Second, goodwill: its impairment loss is never reversed (IAS 36.124), because a later recovery cannot be separated from internally generated goodwill, which IAS 38 forbids an entity to recognize. The entity allocates a CGU reversal pro rata to the assets other than goodwill, subject to the same cap.

Worked Example 3: Applying the Reversal Cap

An asset cost $200,000, depreciated straight line over 10 years with no residual value: $20,000 a year. At the end of year 2, its carrying amount of $160,000 was impaired to a recoverable amount of $100,000, and depreciation over the remaining eight years became $12,500 a year. At the end of year 5, recoverable amount has recovered to $150,000. How much can be reversed?

Step	Amount ($)
Carrying amount at end of year 5 ($100,000 less 3 x $12,500)	62,500
Recoverable amount at end of year 5	150,000
Cap: carrying amount with no impairment ($200,000 less 5 x $20,000)	100,000
Maximum carrying amount after reversal (lower of recoverable amount and cap)	100,000
Reversal credited to profit or loss	37,500

The trap is reversing the full gap to $150,000. The cap bites first: the asset returns only to $100,000, the reversal is $37,500, and depreciation for the remaining five years returns to $20,000 a year. Revise the cap rule and the goodwill rule together; both are pure rule recall wrapped in simple arithmetic.

Exam Traps That Cost Marks in IAS 36 Impairment Notes

• Taking the lower figure. Recoverable amount is the higher of FVLCD and value in use, never the lower. This one word flips every number in the answer.
• Mixing tax treatments. Value in use uses pre-tax cash flows and a pre-tax discount rate. Post-tax inputs do not belong in the calculation.
• Forecasting too far, too fast. Projections run for a maximum of five years unless a longer period is justified, and the growth rate after that must be steady or declining.
• Counting improvements and uncommitted restructurings. Value in use excludes cash flows from enhancing the asset, or from an uncommitted restructuring.
• Allocating the CGU loss in the wrong order. Goodwill goes first. Only the balance is pro rata, and no asset falls below its IAS 36.105 floor.
• Reversing goodwill. It is prohibited, permanently, whatever the scenario says about trading recovery.
• Breaking the reversal cap. A reversed asset cannot sit above the carrying amount it would have reached under normal depreciation.
• Testing everything every year. The mandatory annual test covers goodwill, indefinite-life intangibles and intangibles not yet available for use. Other assets are tested on indicators.

One-Page Revision Box

• Impairment loss = carrying amount less recoverable amount, when carrying amount is higher.
• Recoverable amount = higher of fair value less costs of disposal and value in use.
• Value in use = discounted pre-tax cash flows from continuing use plus disposal, budgets up to five years, financing and tax excluded.
• Annual test, no indicators needed: goodwill, indefinite-life intangibles, intangibles not yet available for use.
• CGU = smallest group of assets with largely independent cash inflows.
• CGU loss order: goodwill to zero first, then pro rata, subject to the per-asset floor.
• Reversal: allowed for assets other than goodwill, only on changed estimates, capped at depreciated historical carrying amount.
• Goodwill impairment: never reversed.

Frequently Asked Questions

Does every asset need an IAS 36 impairment test every year?

No. Only goodwill, indefinite-life intangibles and intangibles not yet available for use get the mandatory annual test. Everything else is tested on indicators.

Why does recoverable amount use the higher of the two measures?

Because the owner will choose the better outcome: the asset is worth whichever of sale value or use value recovers more. The lower figure would understate what the business can genuinely recover.

Can a goodwill impairment loss be reversed if profits recover?

No. IAS 36.124 prohibits it in all cases. A later increase in recoverable amount likely reflects internally generated goodwill, which IAS 38 does not allow an entity to recognize.

Does IAS 36 apply to inventory and trade receivables?

No. Inventories follow IAS 2, which writes them down to net realizable value. Trade receivables are financial assets, so IFRS 9 and its expected credit loss model apply instead. Sending each asset to its own standard is a frequent source of easy marks.

What happens to depreciation after an impairment or a reversal?

The entity recalculates it on the revised carrying amount over the remaining useful life. In Worked Example 3 the charge falls to $12,500 after impairment and returns to $20,000 after the capped reversal.

Sources: IAS 36 Impairment of Assets, IFRS Foundation (36.18; 36.30 to 36.57; 36.104 to 36.105; 36.117; 36.124); KPMG IFRS Institute, Goodwill impairment: IFRS Accounting Standards vs US GAAP; Grant Thornton, IAS 36 overview of the standard; ACCA, pass rates for ACCA qualifications (FR, September 2026).