Impairment Calculator
for Real Estate

IAS 36 impairment testing for Real Estate

Real estate entities often assume IAS 36 doesn't apply to them because investment property sits under IAS 40. That assumption is wrong in several important situations. Owner-occupied property falls under IAS 16 and is within IAS 36's full scope. Property under development that hasn't yet transferred to investment property may be tested under IAS 36 during the development phase. Goodwill from acquiring property portfolios or management platforms requires annual testing under IAS 36.10. And property companies that elect the IAS 40 cost model (rather than the fair value model) must test for impairment under IAS 36 whenever indicators arise. For a mid-market real estate group with a mix of owner-occupied head offices, development sites, and acquired property management businesses, IAS 36 testing covers a material portion of the balance sheet.

The VIU model for real estate assets differs from most industries because cash flow patterns are more predictable but more sensitive to discount rate assumptions. Rental income from leased properties follows contractual terms, with escalation clauses providing visibility over the explicit forecast period. The challenge sits in the terminal value: what happens after current leases expire? IAS 36.39 includes cash flows from continuing use and ultimate disposal. For owner-occupied property, VIU reflects the entity's use of the building (avoided rental cost or contribution to operations), not the rental income the entity could earn from leasing it out. IAS 36.43 prohibits including cash flows from a future use that differs from the asset's current use. Real estate discount rates reflect property-sector yields adjusted for asset-specific risk. A Class A office in Amsterdam carries different risk from a secondary logistics warehouse in a provincial town. European real estate pre-tax WACCs typically fall between 6.0% and 9.0%, depending on asset quality, location, and tenant profile.

Audit findings in real estate impairment testing cluster around four recurring areas. First, preparers using post-tax discount rates without grossing up, a violation common across industries but especially frequent in real estate where property yields are typically quoted on a post-tax basis. Second, development projects where management capitalises costs beyond the point at which impairment indicators have arisen. If a development site's planning permission is refused or construction costs have overrun by 30%, the entity should test for impairment at that point rather than continuing to capitalise and deferring the test. Third, CGU identification for mixed-use developments where residential, commercial, and retail components share common infrastructure but generate independent rental streams. Fourth, terminal growth rates set above observable long-term rental growth without supporting evidence, which conflicts with IAS 36.33(c).

For real estate CGUs, input the carrying amount of all non-investment-property assets: owner-occupied property at cost less depreciation, development work in progress, acquired goodwill, and property management intangibles. Set the discount rate to a property-sector rate adjusted for the specific asset's risk profile. For terminal growth, European real estate rental growth has averaged 1.0% to 2.0% over the long term, but this varies significantly by sector (logistics has outpaced office in recent years). The forecast period should match the lease expiry profile where applicable. If primary leases expire in seven years, a seven-year forecast may be more appropriate than the default five.