The net of the acquisition‑date amounts of the identifiable assets acquired and liabilities assumed measured in accordance with IFRS 3. In a business combination achieved in stages, the acquisition‑date fair value of the acquirer’s previously held equity interest in the acquiree. Therefore your need to establish cash-generating unit for this pizza oven – it would probably be the whole pizzeria.

Reversing an impairment loss for a cash‑generating unit

These amounts should be disclosed separately for each material impaired asset or CGU, or for each class of assets or CGUs for which the impairment is not material. In the realm of accounting, the measurement of impairment loss plays a crucial role in accurately reflecting the financial health and value of an organization’s assets. When an asset’s carrying amount exceeds its recoverable amount, it is an indication that the asset may be impaired.

Identifying the cash‑generating unit to which an asset belongs

Each impairment model has its own complexities in determining the unit of account, knowing when to test for impairment, and calculating the amount of any impairment loss. But while each model is independent, they are also inextricably linked – containing overlapping concepts and requiring a specific sequence in impairment testing. Impairment loss affects the financial performance and position of a company, as it reduces the net income, earnings per share, return on assets, and equity of the company.

Internal factors

In this section, we will delve into the signs that can help identify such indicators. It is important to approach this topic from various perspectives to gain a comprehensive understanding. The impairment loss is measured as the difference between the asset’s carrying amount and its fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants. This reflects what the market would pay, not what the company believes the asset is worth for its own use.

The Impairment Testing Process

However, the discount rate(s) used to measure an asset’s value in use shall not reflect risks for which the future cash flow estimates have been adjusted. The carrying amount is the amount at which an asset is recognized in the balance sheet, net of any accumulated depreciation and impairment losses. The recoverable amount is the higher of the fair value less costs of disposal and the value in use. The fair value less costs of disposal is the amount that could be obtained from selling the asset in an arm’s length transaction between knowledgeable and willing parties, minus any costs of disposal.

When an indicator suggests a possible impairment, a company must perform a formal test. The process compares the asset’s recorded value to the economic benefit it is expected to generate. External indicators originate from the business environment and include a significant adverse change in the legal or business climate, a substantial decrease in the asset’s market price, or an economic downturn. The expected cash flow approach also allows use of present value techniques when the timing of cash flows is uncertain.

• U.S. GAAP also requires specific disclosures in the financial statement footnotes to provide context for the impairment.
• However, in some cases, it may not be feasible or cost-effective to estimate both the FVLCD and the VIU.
• However, if some or all of the goodwill allocated to a cash‑generating unit was acquired in a business combination during the current annual period, that unit shall be tested for impairment before the end of the current annual period.
• The measurement of impairment loss is a vital aspect of financial reporting, ensuring that assets are accurately valued.
• If the circumstances that caused the impairment of a tangible asset change or no longer exist, the impairment loss may be reversed, subject to certain limitations.
• The reversal of impairment loss increases the income and the earnings per share of the entity.

3 Impairment loss of cash-generating unit

For example, if the reversal of impairment loss is $40,000, the income statement will show a gain of $40,000, which will increase the net income and the earnings per share by the same amount. Asset impairment is a critical aspect of financial reporting and decision-making. By understanding the concept of asset impairment and its implications, companies can ensure accurate financial statements and make informed choices regarding their assets. From a financial perspective, asset impairment is crucial because it affects the company’s profitability and financial health. When an asset is impaired, its carrying value is adjusted to its fair value, resulting in a decrease in the company’s net income and shareholders’ equity.

• Paragraphs 110⁠–⁠116 set out the requirements for reversing an impairment loss recognised for an asset or a cash‑generating unit in prior periods.
• The objective of IAS 36 Impairment of assets is to make sure that entity’s assets are carried at no more than their recoverable amount.
• Suppose a company owns a machine that cost $100,000 and has a useful life of 10 years.
• For intangible assets other than goodwill, the testing process can begin with an optional qualitative assessment.

Free VIDEO lecture: Overview of IAS 36 in 12 minutes

Impairment occurs when an asset’s carrying amount (book value) exceeds its recoverable amount, requiring a write-down in the financial statements. Under IAS 36, this applies to tangible and intangible assets (e.g., machinery, goodwill). In the ACCA FR exam, you’ll calculate impairment impairment of assets boundless accounting losses and understand their impact on financial reporting. Asset impairment is a situation where the carrying amount of an asset exceeds its recoverable amount. This means that the asset is not generating enough cash flows to justify its value on the balance sheet. When this happens, the asset must be written down to its fair value, and the difference between the carrying amount and the fair value is recognized as an impairment loss in the income statement.

This adjustment ensures that the financial statements provide a realistic picture of the company’s financial position. If a subsidiary, or part of a subsidiary, with a non‑controlling interest is itself a cash‑generating unit, the impairment loss is allocated between the parent and the non‑controlling interest on the same basis as that on which profit or loss is allocated. Paragraph 104 requires any identified impairment loss to be allocated first to reduce the carrying amount of goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. The application of an expected cash flow approach is subject to a cost‑benefit constraint.

In some circumstances, such as those in which comparable assets can be observed in the marketplace, a traditional approach is relatively easy to apply. For assets with contractual cash flows, it is consistent with the manner in which marketplace participants describe assets, as in ‘a 12 per cent bond’. The aggregate carrying amount of intangible assets with indefinite useful lives allocated to those units (groups of units). The carrying amount of intangible assets with indefinite useful lives allocated to the unit (group of units). The amount of impairment losses on revalued assets recognised in other comprehensive income during the period.

Indicators of Impairment

Brand engagement is a critical concept in the realm of marketing and brand strategy, representing… In the modern business landscape, companies are constantly grappling with the challenge of… Business assets that have suffered a loss in value are given two tests to measure and recognize the amount of the loss. © 2025 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. KPMG’s multi-disciplinary approach and deep, practical industry knowledge help clients meet challenges and respond to opportunities.

This adjustment reflects the dynamic nature of business environments, where market conditions, technological advancements, and regulatory changes can swiftly alter asset valuations. The process ensures that financial statements remain relevant and reflective of current realities, rather than outdated historical costs. Estimated cash flows and discount rates should be free from both bias and factors unrelated to the asset in question. For example, deliberately understating estimated net cash flows to enhance the apparent future profitability of an asset introduces a bias into the measurement.

The measurement of impairment loss involves a systematic process that requires careful analysis and estimation. It is important to note that impairment loss is recognized only when the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell or its value in use. Fair value represents the price at which an asset could be exchanged between knowledgeable and willing parties, while the value in use reflects the present value of expected future cash flows generated by the asset. Under IAS 36, the recoverable amount is defined as the higher of an asset’s fair value less costs to sell and its value in use.

However, the reversal cannot exceed the amount that would have been determined if no impairment loss had been recognized in the fifth year, which is $40,000. Therefore, the company limits the reversal to $10,000 ($40,000 – $30,000) and increases the carrying amount of the machine to $28,000. The company continues to depreciate the machine over the remaining three years, resulting in a carrying amount of $10,000 at the end of the tenth year. Impairment analysis is subject to significant judgment and estimation uncertainty, as it relies on various assumptions and projections about the future cash flows, discount rates, growth rates, and market conditions of the asset or the CGU. In this blog, we have discussed the concept of asset impairment, the indicators of impairment, the methods of measuring impairment loss, and the accounting treatment of impairment loss. We have also examined the impact of impairment loss on the financial statements and ratios of a company, and the challenges and limitations of impairment analysis.