What Is an Impairment Test Under IAS 36?
An impairment test is the process of checking whether an asset's carrying amount on the balance sheet is still supportable — and writing it down if it isn't. Most assets only need an impairment test when there's an indicator of impairment — a drop in market value, adverse changes in the business environment, obsolescence, or underperformance against forecast. Goodwill and indefinite-life intangible assets are the exception: they must be tested at least annually, regardless of indicators.
Cash-Generating Units
Many assets don't generate cash flows independently of other assets, so IAS 36 tests impairment at the cash-generating unit (CGU) level — the smallest identifiable group of assets that generates largely independent cash inflows. Defining CGUs correctly is often the single most consequential judgment in an impairment test, since it determines what's being compared against what.
Recoverable Amount
An asset (or CGU) is impaired when its carrying amount exceeds its recoverable amount — the higher of fair value less costs of disposal and value in use. Value in use requires discounting the asset's expected future cash flows using a pre-tax discount rate that reflects current market assessments of the time value of money and asset-specific risks.
The discount rate and the terminal growth rate assumption are the two inputs most likely to be challenged by auditors, since small changes in either can move the conclusion from 'no impairment' to 'material impairment'.
Goodwill Impairment Testing: The Annual Requirement
Goodwill impairment testing is where IAS 36 gets its reputation for complexity. Unlike most assets, goodwill can never be tested on a standalone basis — it must first be allocated to the cash-generating units (or groups of CGUs) expected to benefit from the synergies of the business combination that created it. From there, testing goodwill for impairment follows the same recoverable-amount logic as any other CGU test, but with two added wrinkles:
- The goodwill impairment test must be performed at least annually, even with no indicator of impairment — this is the single biggest difference from testing other assets.
- Because goodwill sits at the top of a CGU, any impairment loss is applied first to the goodwill allocated to that unit, before being applied pro rata to the other assets within it.
In practice, this means a goodwill impairment test is really a CGU-level valuation exercise — the quality of your cash flow forecasts, discount rate, and CGU allocation all determine whether the goodwill balance survives the test.