IAS 36 – Impairment of Assets: Significant Judgements and Estimates that Define Value

1 IAS 36 Judgements and Estimates -When numbers meet nerves

Every year, management teams perform a ritual that feels half-science, half-therapy: the impairment review. It is the moment when accounting numbers meet corporate nerves. The standards call it an “assessment of recoverable amount” under IAS 36 Impairment of Assets; investors experience it as a confession of whether strategy has delivered value or quietly destroyed it.

Think of impairment testing as a health check for the balance sheet. The accountant is the physician, the cash-generating units (CGUs) are the organs, and the question is simple: are they still functioning well enough to justify their carrying amount? Yet the test involves a cascade of judgements and estimates that determine the story investors will read.

Where IAS 15 taught us to recognise revenue at the right moment, IAS 36 teaches us when to recognise loss — a much harder emotion to measure. Both standards are joined by IAS 1 and IFRS 18, which require that the judgements and sources of estimation uncertainty behind those numbers be disclosed transparently.

2 Objective and scope – The rule that protects credibility

IAS 36 prevents entities from carrying assets at more than their recoverable amount, defined as the higher of fair value less costs of disposal and value in use. The principle sounds crisp; the application is foggy.

When markets fall, when technology changes, or when cash flows disappoint, management must estimate future inflows and discount them to today’s reality. It is here that subjectivity enters through the side door. The choice of CGU boundary, the forecast horizon, the terminal growth rate, and the discount rate can each shift the recoverable amount by millions. Auditors challenge, regulators read carefully, and investors watch for patterns: impairment is not merely accounting; it is governance in action.

IAS 36 interacts directly with:

• IAS 1 (122–133) – requiring disclosure of critical judgements and key assumptions with significant estimation uncertainty;
• IFRS 18 Presentation and Disclosure – modernising how those notes must be structured, cross-referenced and explained to readers;
• IFRS 13 Fair Value Measurement, for the market-based leg of the test; and
• IAS 37 and IFRS 9, when impairment interacts with provisions or financial assets.

Together, they form a disclosure ecosystem designed to make management’s invisible reasoning visible.

Read the original Standard IAS 36 Impairment of Assets on ifrs.org.

3 Where it bites – When assets lose their shine

Impairment testing rarely announces itself politely. It bites when optimism meets reality.

Case 1 – Philips HealthTech (2022)
After years of expansion in medical devices, Philips recorded a €1.5 billion goodwill impairment in its Sleep & Respiratory Care division. The cause: regulatory recalls, weaker demand, and higher discount rates. The judgement lay not only in the cash-flow projections but in deciding whether to treat the US and EU markets as one CGU or two. A single sentence in the notes — “The CGU boundaries have been reassessed to align with the revised operating segments” — concealed weeks of modelling and board debate.

Case 2 – Airbus Defence & Space (2020)
COVID-19 grounded satellites and planes alike. Airbus wrote down €1.2 billion of goodwill. Its impairment model used a 7.8 % pre-tax discount rate and long-term growth of 1 %. A 50 bps shift in either direction would have changed the conclusion. The critical estimate was not the number itself but the credibility of management’s future defence contracts.

Case 3 – Tesla Energy (2021)
Fast-growing divisions hide risk behind growth curves. Tesla disclosed that its Energy Generation segment “approximates recoverable amount to carrying amount”, meaning the headroom was razor-thin. A few months of raw-material inflation could have tipped the balance.

Each case illustrates the same heartbeat: tiny shifts in assumptions can move mountains in valuation. IAS 36 forces management to confront that reality — and to explain it clearly.

4 Why it matters – Volatility, confidence and storytelling

Impairment is not a punishment; it is a reality check. Markets can live with losses, but not with surprises. When a company announces an unexpected impairment, investors ask three questions:

1. Why did management not see this earlier?
2. What does it say about governance and forecasting?
3. Can I still trust next year’s numbers?

Transparent judgement and disclosure are therefore essential to credibility. A well-written impairment note can restore confidence even when the numbers hurt. It shows that management owns its assumptions and understands the forces shaping them.

Note that there is a habit in impairment testing before year-end. However, IAS 36 does not itself contain a rule allowing an impairment test “up to three months before year-end.”

That flexibility appears only for goodwill and intangible assets with indefinite useful lives through a practical allowance acknowledged in IAS 36.96 (and reinforced in IAS 36.9–10, 90–99), but the three-month window is not literally written in IAS 36 — it comes from implementation guidance and common practice endorsed by auditors and regulators.

The relevant paragraphs in IAS 36

That’s the key text. It gives flexibility on timing — not necessarily on proximity to year-end.

5 The IAS 36 judgments – How management shapes the outcome

Impairment testing is a sequence of gates. At each gate, judgement decides whether value passes through or is written off. Below we walk through the main gates using the format that readers of annualreporting.info recognise:

1. Identifying indicators of impairment

Where it bites:
Market declines, higher interest rates, technological change, or strategic restructuring may all suggest an asset’s carrying amount is too high. The decision when to test is itself a judgement.

Why it matters:
Missing an indicator can defer an impairment and overstate assets; overreacting can create needless volatility. Boards often underestimate how early indicators appear in operational KPIs long before in accounting ratios.

What’s the judgement or estimate:
Assessing whether the change in circumstances is significant and not temporary (IAS 36 paragraph 12). It requires integrating financial and non-financial evidence — e.g. a sudden loss of market share, environmental bans, or a fall in market capitalisation below net assets.

Disclosure suggestion:
Under IAS 1 .122, disclose the key judgement that triggered the test:

“Management determined that rising discount rates and regulatory changes constituted an indicator of impairment for the Renewables CGU.”
Under IFRS 18, cross-reference to segment information and risk factors to create a narrative link between performance and impairment.

Read more on our blog – IAS 36 Determine if and when to test for impairment.

2. Defining cash-generating units (CGUs)

Where it bites:
CGUs are the building blocks of impairment testing. Defining them too broadly hides problems; too narrowly amplifies volatility.

Why it matters:
The CGU definition determines the level at which goodwill is allocated and impairment is recognised. Changes in organisational structure, IT systems or customer bases can alter CGU boundaries, requiring reallocation of goodwill and fresh tests.

What’s the judgement or estimate:
IAS 36 paragraphs 66–103 require identifying the smallest group of assets that generate largely independent cash inflows. Judgement is needed when cash flows are interdependent or central costs are shared.

Disclosure suggestion:

“CGUs correspond to operating segments except where production facilities serve multiple segments. Corporate assets such as the ERP system are allocated based on usage.”

Disclose any changes in CGU structure and impact on goodwill allocation (IAS 36 134 a–b). Link this with the “key judgements” note under IAS 1 .122 so users can see that CGU definition is not mechanical but managerial. Defining Cash-Generating Units provides one of the most complicated IAS 36 Assumptions excersises.

Read more on Cash-generating units in our blog – Impairment Example.

3. Estimating future cash flows

Where it bites:
Forecasting five-year cash flows is an act of controlled imagination. Budgets often reflect ambition more than evidence.

Why it matters:
Over-optimistic forecasts defer impairments; overly cautious ones create artificial losses. Regulators such as ESMA and the FRC repeatedly flag that management must justify assumptions with external data.

What’s the judgement or estimate:
IAS 36 paragraph 33 requires cash flows to be based on reasonable and supportable assumptions, consistent with the most recent budgets approved by management. Judgement lies in:

• expected revenue growth and margins;
• inflation and cost-control assumptions;
• planned capital expenditure; and
• the terminal growth rate beyond the forecast horizon.

Disclosure suggestion:
Disclose key assumptions and how they were derived:

“Forecast cash flows reflect a CAGR of 3 % over five years, aligned with industry data from [Source]. Terminal growth rate of 1.5 % reflects long-term GDP trends in core markets.”

Include a sensitivity analysis: ±1 pp in growth or ±50 bps in margin. IAS 36 134 (d)(i) requires disclosure when a reasonably possible change would cause impairment.

Under IAS 1 .125, cross-refer these as sources of estimation uncertainty likely to cause material adjustment in the next period. Estimating future cash flows provides one of the most complicated IAS 36 Estimates excersises.

Read more in our blog on A Basic Guide to Cash Flow Forecasting.

4. Selecting the discount rate

Where it bites:
A half-percentage point change in discount rate can swing valuations by double digits. During 2022–2024, many entities faced this as interest rates surged.

Why it matters:
The discount rate translates future optimism into present caution. Too low, and the future looks artificially bright; too high, and viable assets appear impaired.

What’s the judgement or estimate:
IAS 36 A18–A20 require a pre-tax rate reflecting current market assessments of time value of money and specific risks. In practice, entities derive it from their post-tax weighted average cost of capital (WACC). Judgement lies in:

• risk-free base rate – The starting point, typically derived from long-term government bonds in the currency of the cash flows, representing the time value of money without risk;
• equity risk premium – The expected extra return investors demand for holding equities rather than risk-free assets — it captures the general market’s compensation for uncertainty;
• beta (systematic risk) – A measure of how sensitive the entity’s returns are to overall market movements; it scales the equity risk premium to the company’s relative volatility;
• debt spread and leverage – The incremental return lenders require above the risk-free rate, adjusted for the firm’s capital structure — reflecting credit quality and financing mix;
• country risk premium – An additional yield applied when investing in markets with higher political, economic, or currency risk than the base jurisdiction.

Disclosure suggestion:

“Pre-tax discount rates applied to CGUs ranged from 7.5 % to 9.2 % (2024: 6.8 % to 8.5 %). The increase reflects higher risk-free rates and market volatility.”
Provide sensitivity: ±50 bps change and resulting headroom. Link to market data (IFRS 13 hierarchy) and note under IAS 1 .125 that discount rates are a critical estimate with potential for material revision.

Read more on the use of discount rate – How 2 best account it in DCF-calculations.

5. Choosing between fair value less costs of disposal and value in use

Where it bites:
When both methods produce similar results, the tie-breaker depends on professional judgement. FVLCD relies on market comparables; VIU relies on internal forecasts. Each has strengths and vulnerabilities.

Why it matters:
An entity leaning heavily on VIU exposes itself to bias in internal planning; using FVLCD may be difficult when markets are illiquid. Transparency about the choice is key.

What’s the judgement or estimate:
IAS 36 19 requires using whichever is higher. Judgement arises in deciding whether observable market data exist (thus favouring FVLCD) or whether internal cash-flow models (VIU) are more reliable.

Disclosure suggestion:

“Recoverable amount for the Logistics CGU was determined using value in use, as no active market exists for comparable facilities. Key assumptions include discount rate 8 %, terminal growth 2 %, and forecast horizon five years.”

Under IFRS 18 presentation rules, cross-reference to “Basis of valuation” in the accounting policies section to avoid repetition.

6 Goodwill allocation and reversals – when optimism ages

Goodwill is like reputation: easy to build, fragile to sustain, impossible to reverse once lost. IAS 36 treats it the same way.

When a business combination occurs, the excess of purchase price over identifiable net assets becomes goodwill — a bundle of future expectations. IAS 36 requires that goodwill be allocated to the CGU(s) that are expected to benefit from the combination. That allocation is the first, and often the most consequential, judgement in the impairment process.

Where it bites

Acquisitions made during boom years carry lofty expectations. Years later, when markets cool or strategies shift, those expectations must be re-measured. Determining which CGU should absorb goodwill, and how much, can be contentious — especially after reorganisations.

Why it matters

Allocating goodwill across CGUs changes where future impairment will land. A broad allocation spreads risk; a narrow one concentrates it. During group restructurings, reallocation can even release “hidden” headroom that delays impairment. Regulators watch closely.

What’s the judgement or estimate

IAS 36 paragraph 80 requires that goodwill be allocated to CGUs or groups of CGUs that benefit from the synergy. Management must assess:

• which CGUs actually gained the benefits envisioned in the acquisition;
• whether the original structure still represents how goodwill generates cash flows; and
• if reallocation is needed, whether the method is reasonable and documented.

Once goodwill is impaired, IAS 36 124 forbids reversal, even if fortunes recover.

Disclosure suggestion

Under IAS 36 134(c), disclose for each CGU containing goodwill:

• carrying amount of goodwill;
• basis of recoverable amount (VIU or FVLCD);
• key assumptions and sensitivity;
• period of projection and growth rate.

Tie this disclosure to IAS 1 .122 (judgement in defining CGUs) and IAS 1 .125 (estimation uncertainty in forecasts).
Example wording:

“Goodwill of £48 million arising from the acquisition of MedTech Ltd is allocated to the Global Diagnostics CGU. The recoverable amount is based on value-in-use calculations using a 9 % pre-tax discount rate and a 2 % terminal growth rate. Management considers the allocation and underlying assumptions to represent key sources of estimation uncertainty.”

Read more in our blog – Impairment of assets Highlights.

7 Reversing impairment – a delicate comeback

Unlike goodwill, other assets can recover. IAS 36 paragraphs 109–117 allow reversal of impairment when the reasons for the loss no longer exist.

Where it bites

Economic recoveries, new contracts or successful restructurings may revive previously impaired assets. Yet premature reversal risks creating “paper profits”.

Why it matters

Reversal tests management’s consistency: were prior assumptions conservative or simply wrong? Regulators examine reversals for signs of earnings management.

What’s the judgement or estimate

Assess whether external or internal indicators truly demonstrate recovery, and whether the new recoverable amount exceeds the carrying value only because of changed estimates.

Disclosure suggestion

IAS 36 130 requires disclosing the nature of the asset, the reversal amount, the reasons, and which line item records it. Under IAS 1, flag the judgement that economic improvement is sustainable.

“Impairment losses of €2.4 million on the Transport CGU were reversed following renewed customer contracts and higher utilisation rates.”

Read more in our blog – Reversal of impairment losses

8 Making the invisible visible – disclosure architecture under IAS 36, IAS 1 and IFRS 18

Impairment testing is invisible accounting work; disclosure is the only evidence the outside world ever sees. Good disclosures read like a storyboard: the trigger, the reasoning, the result, and the sensitivity.

IAS 36 126–137 specify minimum content; IAS 1 and IFRS 18 transform that into a cohesive communication framework.

8.1 IAS 36 content pillars

1. Events leading to impairment (or reversal)
2. Nature of the asset / CGU
3. Recoverable amount and method used
4. Key assumptions – discount rate, growth, period, sensitivities
5. Carrying amounts before and after impairment
6. Goodwill and intangible specifics
7. Changes from prior periods

8.2 IAS 1 integration – the front-of-book signal

IAS 1 .122 and .125 require that the critical judgements and sources of estimation uncertainty be disclosed prominently — not buried in the footnotes. Under IFRS 18, these items should appear in the “Notes on key estimates” section with hyperlinks or cross-references to the detailed impairment note.

Example integration:

Note 3 – Key accounting estimates and judgements
Impairment testing (IAS 36) – The group determines recoverable amounts for CGUs using value-in-use models. Key judgements include defining CGU boundaries and allocating goodwill. Significant estimation uncertainties relate to discount rates (7–9 %) and terminal growth (1–2 %). A 50 bps increase in discount rate would reduce headroom by £6 million.*

8.3 IFRS 18 – Presentation and cross-reference discipline

IFRS 18 encourages connected storytelling: each assumption should be traceable across notes. Link impairment assumptions to:

• segments (IFRS 8) – which CGU belongs to which segment;
• risks (IFRS 7/IFRS 9) – financial and market risk context;
• fair value measurement (IFRS 13) – hierarchy and methods.

In modern digital reporting, cross-tagging (e.g. iXBRL) ensures users can see how each disclosure interacts with others.

Governance insight: Boards should ensure that impairment disclosures match what the audit committee saw in management papers — investors notice discrepancies.

Read more on Estimates and judgments in the Accounting and Business Magazine from ACCA Global, the only truly global professional accountancy body.

9 Illustrative case – Acme Manufacturing Ltd

A narrative example shows how these judgements materialise.

The setting

Acme Manufacturing Ltd produces advanced sensors. Demand has slowed, raw material costs have soared, and its share price fell 40 %. Management conducts an impairment test on the Industrial Sensors CGU, which includes goodwill of €10 million from a prior acquisition.

Step 1 – Indicators identified

Falling margins and order cancellations indicate impairment.

Step 2 – CGU definition

Acme’s European and Asian operations share technology but serve distinct customers; management concludes each is a separate CGU.

Step 3 – Recoverable amount estimation

They model five-year cash flows with 3 % growth, 2 % terminal growth, and a 9 % discount rate.

• Value in use: €42 million
• Fair value less costs of disposal: €40 million
  Recoverable amount = €42 million.
  Carrying amount = €49 million → impairment = €7 million.

Step 4 – Allocation and recognition

Goodwill of €10 million is fully impaired (€7 million) with the remainder reducing plant assets.

Step 5 – Disclosure draft

Note X – Impairment of Industrial Sensors CGU
The Group recognised an impairment loss of €7 million (2024: nil). The recoverable amount was determined using value in use, based on five-year cash flow projections approved by management.
Key assumptions: growth 3 %, terminal 2 %, pre-tax discount 9 %.
A 1 % decrease in growth or a 50 bps increase in discount rate would reduce recoverable amount by €3 million.
The impairment primarily relates to goodwill recognised on the acquisition of SensorTech B.V. in 2019.

Step 6 – Link to IAS 1 note

Note 2 – Critical accounting estimates
The determination of value in use requires management to estimate future cash flows and select an appropriate discount rate. Given the volatility in industrial demand, these represent significant sources of estimation uncertainty (IAS 1 .125).

This narrative note mirrors the clarity and tone of your IFRS 15 blog: factual yet human, analytical yet readable.

10 Common pitfalls – and why governance matters

Impairment tests often fail not because of technical flaws but because of behavioural bias. Below are recurring pitfalls and how boards can prevent them.

1. Boilerplate language

Too many notes read like they were copied from a template. Replace “reasonably possible changes” with quantified, entity-specific examples.

Governance tip: Have the audit committee read the draft note aloud — if they cannot tell which company it belongs to, rewrite it.

2. CGU boundaries set for convenience

Merging multiple units hides underperformance.
Tip: Ensure CGU boundaries match how the business is managed, not how impairment is minimised.

3. Discount-rate inertia

Entities sometimes roll forward last year’s rate without updating for market shifts. In a high-inflation environment, that understates risk.

4. Optimistic budgets

Forecasts often mirror internal targets, not realistic expectations. Require independent review or benchmarking.

5. Failure to disclose sensitivity

Users need to know the break-even point. Without sensitivity analysis, the disclosure lacks credibility.

6. Ignoring reversals

When markets recover, entities forget to reassess prior impairments. IAS 36 expects symmetrical attention: monitor for recovery as diligently as for decline.

7. Disconnect between MD&A and financial statements

Narrative reporting (management commentary) may mention challenges that the financial statements ignore. IFRS 18 and regulators increasingly scrutinise such inconsistencies.

Read more on disclosure of significant accounting estimates from the Financial Markets Authority, New Zealand’s principal conduct regulator for financial markets.

11 Best-practice disclosure examples

Theme	Example wording	Why it works
Entity-specific assumptions	“Cash-flow forecasts reflect volume growth of 2 % p.a., consistent with the European market for precision sensors (source: Eurostat 2025).”	Links internal data to external evidence.
Sensitivity analysis	“A 100 bps rise in discount rate would reduce headroom by £8 million, eliminating the buffer in the Aerospace CGU.”	Quantifies risk and informs investors.
CGU changes	“Following reorganisation, the former Mobility CGU has been split into Urban and Rural Segments; goodwill of €12 million was reallocated.”	Demonstrates transparent change management.
Cross-reference discipline	“See Note 14 for the fair-value hierarchy of inputs (IFRS 13).”	Encourages integrated reporting.
Plain language	“We tested whether the business still earns enough to justify its book value.”	Humanises technical content; aids comprehension.

 

12 Governance and behaviour – judgement under the spotlight

Impairment is a mirror. It reflects not only cash-flow projections and discount rates but also the governance culture behind them. When managements delay impairments or wrap them in boilerplate language, investors sense denial. When they acknowledge assumptions openly, trust rises even in loss years.

12.1 The board’s role

A diligent board treats impairment not as a formality but as an early-warning system.

• Before year-end: challenge whether triggers have appeared (customer churn, project cancellations, cost inflation).
• During the test: question consistency between strategic forecasts and impairment models.
• After the test: ensure disclosure explains why assumptions changed, not just that they did.

Audit committees should insist on sensitivity analysis and back-testing: did last year’s forecasts come true?
If not, what was learnt?

12.2 Behavioural biases to guard against

Bias	Description	Control
Anchoring	Sticking too closely to previous valuations even when market evidence changes.	Re-estimate discount rates from first principles each year.
Confirmation bias	Selecting data that supports optimism.	Involve independent reviewers or external benchmarks.
Availability bias	Over-weighting recent positive news.	Use multi-year trend data.
Groupthink	Avoiding confrontation in impairment meetings.	Encourage dissenting views and document them.

 

Metaphor: Impairment committees should act like mountain-climbers tied by one rope: safety depends on everyone testing the knots.

12.3 Regulatory expectations

European regulators (ESMA 2024 priorities) continue to flag:

1. Transparent disclosure of key assumptions and sensitivities;
2. Consistency between management commentary and financial statements;
3. Re-assessment of CGU structures after reorganisations;
4. Integration of climate-related and ESG factors into impairment estimates.

13 Impairment and ESG – the new frontier

Sustainability risks now infiltrate impairment models. Under IAS 36, climate change is an external indicator: if carbon-pricing, regulatory caps, or obsolescence threaten future cash flows, an impairment trigger exists.

Example: a steel producer facing carbon-tax expansion must include higher future outflows or invest in abatement technology. Both reduce value in use.

Disclosure opportunity: integrate climate assumptions into impairment notes:

“Future cash-flow projections include €40 million of decarbonisation investments required to meet 2030 targets.”

This bridges IAS 36 with CSRD and IFRS S2 expectations, showing governance maturity.

14 Key takeaways – turning judgement into credibility

1. IAS 36 is not about pessimism; it is about realism.
2. Every step is a judgement call: identifying indicators, defining CGUs, forecasting, selecting discount rates, allocating goodwill.
3. IAS 1 and IFRS 18 transform those internal decisions into external transparency.
4. Sensitivity analysis is the language of honesty.
5. Boards and auditors are co-custodians of credibility.
6. Better storytelling equals lower risk premium: markets reward clarity more than optimism.

Metaphor: Impairment testing is like sailing: the compass (standard) points north, but the wind (markets) constantly shifts. Skilled crews adjust sails early; reckless ones capsize. Disclosure is the logbook proving you knew where you were heading.

15 Frequently Asked Questions (6 FAQs)