• Companion guide: numeric, worked-example walkthroughs of IAS 36 impairment testing, building directly on “IAS 36 Impairment of Assets,” which explains the recognition and measurement rules conceptually.
• Recoverable amount is the higher of two figures: fair value less costs of disposal (FVLCD) and value in use (VIU) — an asset is only impaired when its carrying amount exceeds whichever of the two is greater.
• Cash-generating unit (CGU) allocation follows a strict order: any impairment loss is applied to goodwill first, in full, before the remainder is spread pro-rata across the CGU’s other assets by carrying amount.
• Reversals are capped, not automatic: a recovered asset’s carrying amount can never be written back up beyond what it would have been, net of depreciation, had the original impairment never happened — and goodwill impairment can never be reversed at all.

Worked Example 1: A Single-Asset Impairment Test

A manufacturer owns a specialized machine with a carrying amount of $500,000. Following a sustained downturn in demand for the product line it produces, management identifies an impairment indicator and tests the asset for impairment. The machine could be sold today for $420,000 net of disposal costs, or management estimates it could generate $460,000 in discounted future cash flows if kept in use.

• Step 1 — Determine fair value less costs of disposal (FVLCD): $420,000, based on an active secondhand market price for comparable machinery less estimated selling costs.
• Step 2 — Determine value in use (VIU): $460,000, the present value of the machine’s estimated future net cash flows discounted at a rate reflecting the asset’s specific risks.
• Step 3 — Determine the recoverable amount: the higher of the two — $460,000 (value in use), since it exceeds the $420,000 FVLCD.
• Step 4 — Compare to carrying amount and recognize any loss: carrying amount of $500,000 exceeds the $460,000 recoverable amount, so an impairment loss of $40,000 is recognized immediately in profit or loss, and the machine’s carrying amount is written down to $460,000.

Note: if the machine’s value in use had instead been estimated at only $390,000 — below the $420,000 FVLCD — the recoverable amount would have been $420,000 (FVLCD) instead, and the impairment loss would have been $80,000, not $40,000. Always compare against the higher of the two figures, never assume one or the other applies by default.

Worked Example 2: Allocating an Impairment Loss Across a Cash-Generating Unit

A retail chain acquired a store location three years ago, recognizing $50,000 of goodwill at the time. The store cannot generate cash flows independently of the wider chain’s brand and supply arrangements, so it is tested for impairment as part of a CGU that also includes a building carried at $300,000 and fixtures and equipment carried at $150,000 — a total CGU carrying amount of $500,000, including goodwill. Declining footfall triggers an impairment test, and the CGU’s recoverable amount is determined to be $410,000.

• Step 1 — Determine the total impairment loss: CGU carrying amount ($500,000) less recoverable amount ($410,000) = $90,000 total impairment loss to allocate.
• Step 2 — Allocate to goodwill first, in full: the entire $50,000 goodwill balance is written off first, before any other asset in the CGU is touched. This leaves $40,000 of the impairment loss ($90,000 − $50,000) still to be allocated.
• Step 3 — Allocate the remainder pro-rata by carrying amount: the building and equipment share the remaining $40,000 in proportion to their carrying amounts ($300,000 and $150,000, a combined $450,000). The building absorbs 300,000⁄450,000 × $40,000 = $26,667, and the equipment absorbs 150,000⁄450,000 × $40,000 = $13,333.
• Step 4 — Check the floor for each individual asset: no asset in the CGU can be written down below the highest of its own FVLCD, its own value in use, or zero. In this example neither the building nor the equipment breaches that floor, so the pro-rata allocation stands as calculated; if either had, the excess would be reallocated across the remaining assets instead.

Worked Example 3: Reversing a Previously Recognized Impairment Loss

Two years ago, an entity impaired a piece of equipment from a carrying amount of $200,000 down to a recoverable amount of $150,000 — a $50,000 loss — at a point when the equipment had 10 years of remaining useful life. Since then, the equipment has been depreciated on the reduced $150,000 base over its remaining 8-year life. This year, the market for the equipment’s output has recovered, and the recoverable amount is reassessed at $145,000.

• Step 1 — Determine the current carrying amount (post-impairment, post-depreciation): depreciating $150,000 over 8 years gives $18,750 per year; after 2 years of depreciation, the current carrying amount is $150,000 − (2 × $18,750) = $112,500.
• Step 2 — Determine what the carrying amount would have been with no impairment ever recognized: the original $200,000 carrying amount, depreciated over its original 10-year life, gives $20,000 per year; after 2 years, that hypothetical carrying amount would be $200,000 − (2 × $20,000) = $160,000. This figure is the reversal cap.
• Step 3 — Compare the new recoverable amount to the cap: the reassessed recoverable amount ($145,000) is below the $160,000 cap, so the reversal is based on the recoverable amount, not the cap itself.
• Step 4 — Calculate the reversal: new recoverable amount ($145,000) less current carrying amount ($112,500) = a reversal of $32,500, recognized immediately in profit or loss. The equipment’s carrying amount becomes $145,000, still below the $160,000 no-impairment-ever benchmark — the cap was not the binding constraint here, but it always must be checked.
• Critical exception: if the original $50,000 impairment loss had been against goodwill rather than equipment, none of it could ever be reversed, no matter how much the CGU’s prospects improved — this worked example’s mechanics apply only to non-goodwill assets.

Common Worked-Example Mistakes

• Using only one of FVLCD or value in use instead of comparing both and taking the higher — this understates the recoverable amount and overstates the impairment loss whenever the figure not used would actually have been higher.
• Allocating a CGU impairment loss pro-rata across all assets including goodwill — goodwill must always absorb the loss first and in full before any other asset is touched.
• Writing an individual CGU asset down below its own recoverable amount floor during pro-rata allocation, rather than reallocating any excess to the CGU’s other assets.
• Reversing an impairment loss back to the original pre-impairment carrying amount instead of capping it at what the carrying amount would have been net of the depreciation that would have been charged anyway.
• Reversing a goodwill impairment loss under any circumstances — this is prohibited outright, regardless of how much a CGU’s recoverable amount recovers in later periods.