Impairment Calculator
for Construction

IAS 36 impairment testing for Construction

Construction companies hold assets that create specific challenges for IAS 36 testing. Heavy plant and equipment (cranes, excavators, concrete pumps) may be shared across multiple projects. Workshop and depot facilities support the fleet but don't generate revenue independently. Goodwill from acquiring specialist subcontractors (piling contractors, M&E installers, scaffolding companies) reflects the acquired entity's order book, workforce, and client relationships. Construction revenue itself is recognised under IFRS 15 over time, so the link between assets and cash inflows follows project timelines rather than steady-state operational patterns. This project-based cash flow profile makes VIU modelling less straightforward than in industries with recurring revenue.

CGU identification in construction depends on how the entity deploys its assets. A plant hire division that rents equipment to third parties as well as internal projects may be a separate CGU because it generates external cash inflows independently. A construction division that uses its own fleet on construction contracts forms a CGU based on the division's combined operations. IAS 36.66 applies: the smallest group of assets generating independent cash inflows. For a specialist subcontractor acquired and operated as a standalone business unit, the subcontractor is typically the CGU. Auditors should examine internal management reports to confirm CGU boundaries match how the board monitors performance and allocates capital. If the entity tracks profitability by project rather than by asset group, the CGU structure should reflect that operational reality.

The cyclical nature of construction creates frequent impairment indicators. A downturn in the construction market reduces both utilisation rates for equipment and forward order books. IAS 36.12(d) lists a decline in an asset's economic performance as an internal indicator. For construction plant, this means monitoring utilisation rates: if a crane fleet historically operates at 75% utilisation but current rates have dropped to 50%, that's an indicator. IAS 36.12(b) lists adverse market changes, and a construction sector recession clearly qualifies. Audit inspection findings in construction often focus on two points. First, management teams that use internal hire rates (the rates charged to projects for using company-owned equipment) as a proxy for market rental rates, without verifying those rates against external hire companies. Second, VIU models that assume a return to peak-cycle utilisation within two years of a downturn, without supporting evidence from order books or market forecasts.

For construction CGUs, input the carrying amount of plant and equipment, depot facilities, and allocated goodwill. The discount rate should reflect construction-sector risk: higher than most industries because of project concentration, contract disputes, and cyclicality. European mid-market construction companies typically apply pre-tax WACCs between 9.0% and 12.0%. Terminal growth should be modest (0.5% to 1.5%) reflecting long-term construction output growth. For the forecast period, align with the entity's secured order book where possible. If the entity has two years of confirmed orders but no visibility beyond that, the near-term projections have strong support but years three to five require market-based assumptions that should be stress-tested.