When Impairment Testing Is Required
Most assets only need impairment testing 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 Allocation
Goodwill from a business combination must be allocated to the CGUs (or groups of CGUs) expected to benefit from the synergies of the combination, and tested for impairment as part of that unit — never on a standalone basis.