IAS 36.18 defines recoverable amount as the higher of an asset's fair value less costs of disposal and its value in use. If either amount exceeds the carrying amount, the asset is not impaired and the other amount need not be estimated. Value in use is the present value of future cash flows expected from the asset, discounted at a pre-tax rate reflecting the time value of money and risks specific to the asset (IAS 36.30).
CGU / Asset
Identify the cash-generating unit or individual asset being tested and enter its carrying amount from the balance sheet.
Discount & terminal growth rate
The pre-tax discount rate reflects the time value of money and risks specific to the asset. The terminal growth rate is applied to cash flows beyond the explicit forecast period using the Gordon Growth Model.
Forecast cash flows
Enter projected pre-tax cash flows for each forecast year. IAS 36.33 limits explicit forecasts to five years unless a longer period can be justified.
Fair value less costs of disposal
IAS 36.18 defines recoverable amount as the higher of value in use and FVLCD. If FVLCD cannot be determined, value in use alone is used.
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IAS 36.6: An asset is impaired when its carrying amount exceeds its recoverable amount.
IAS 36.18: Recoverable amount is the higher of fair value less costs of disposal and value in use.
IAS 36.30: Value in use reflects the present value of future cash flows expected to be derived from the asset, discounted at a pre-tax rate.
IAS 36 impairment testing: complete methodology
IAS 36 Impairment of Assets ensures that assets are not carried at more than their recoverable amount. The standard applies to all assets except those covered by other standards (inventories, deferred tax assets, financial instruments, and investment property measured at fair value).
The DCF approach to value in use
Value in use is calculated by estimating future cash flows from the asset over its remaining useful life and discounting them to present value. Cash flow projections must be based on reasonable and supportable assumptions representing management's best estimate of economic conditions (IAS 36.33). Projections beyond five years must use a steady or declining growth rate unless an increasing rate can be justified.
Selecting the discount rate
IAS 36.55 requires a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset. In practice, this is typically derived from the entity's weighted average cost of capital (WACC), adjusted for specific risks not already reflected in the cash flow estimates. The rate should be independent of the entity's capital structure.
Cash-generating units
When an individual asset's recoverable amount cannot be estimated, IAS 36.66 requires the entity to determine the recoverable amount of the cash-generating unit (CGU) to which the asset belongs. A CGU is the smallest identifiable group of assets that generates cash inflows largely independent of those from other assets.