Impairment Calculator
for Energy & Utilities

IAS 36 impairment testing for Energy & Utilities

Energy and utility companies carry some of the largest fixed-asset bases of any industry. A mid-market power generator might hold EUR 30M to EUR 200M in generation assets (gas turbines, wind farms, solar installations), plus grid infrastructure, exploration assets, and goodwill from acquiring distribution networks. IAS 36 applies to all of these, though IFRS 6 provides a separate impairment framework for exploration and evaluation assets in their early stages. The energy transition is creating a permanent impairment indicator environment: coal-fired and gas-fired generation assets face declining utilisation as renewable capacity increases, carbon pricing makes fossil generation more expensive, and governments legislate phase-out dates. IAS 36.12(b) identifies changes in the technological, market, or legal environment as external indicators. For a gas-fired power plant, all three indicators may apply simultaneously.

VIU modelling for energy assets is technically demanding because cash flows depend on commodity prices, regulatory tariffs, capacity factors, and carbon costs. IAS 36.30(a) requires expected cash flows reflecting the range of possible outcomes, weighted by probability. For a wind farm, this means modelling different wind yield scenarios (P50, P75, P90 production estimates) and weighting them. For a gas plant, it means modelling forward gas prices, spark spreads, and carbon permit costs over the forecast period. IAS 36.33 permits forecast periods beyond five years for energy assets where the entity can justify the longer horizon. A wind farm with a 25-year expected life and 15-year power purchase agreement can support a 15-year explicit forecast. The discount rate should reflect the specific risk of the asset: a contracted renewable energy project with a feed-in tariff carries lower risk than a merchant gas plant exposed to wholesale market prices. European energy pre-tax WACCs range from 5.5% for regulated utilities to 10.0% or higher for uncontracted generation assets.

Regulators have flagged energy impairment testing as a priority area. The FRC's thematic review on climate-related reporting found that many energy companies acknowledge climate risk in their front-half narrative but fail to reflect it consistently in IAS 36 models in the back half. If the annual report states that the entity plans to achieve net zero by 2040 but the VIU model assumes gas generation continues at current levels until 2050, that inconsistency is a material issue. The ESMA has also issued guidance requiring entities to ensure consistency between climate commitments and financial statement assumptions. For auditors, this creates a specific ISA 720 obligation to check for inconsistencies between the other information and the financial statements.

For energy CGUs, input the full carrying amount of generation or infrastructure assets plus allocated goodwill. Set the discount rate based on the asset's risk profile: regulated assets with tariff certainty at 5.5% to 7.0%, contracted renewable assets at 6.0% to 8.0%, and merchant generation at 8.0% to 10.0%. Terminal growth for utilities should align with regulated tariff escalation (often inflation-linked). For generation assets, consider whether a terminal value is appropriate at all: if the asset has a finite life (a 25-year wind farm concession), model the full life explicitly with a residual value at end of life rather than applying a perpetuity growth rate.