Asset impairment: compare carrying amount with recoverable amount
A machine sits idle after a contract ends. It is still in the register at 100,000 and still depreciating, so nothing looks wrong. Under IAS 36 as adopted in the UK, an asset becoming idle is an impairment indicator, and an indicator at the reporting date means estimating recoverable amount: the higher of fair value less costs of disposal and value in use. If recoverable amount is below carrying amount, the difference is an impairment loss. The test only works on the right unit. That is the individual asset if its cash inflows are largely independent. If they are not, recoverable amount is normally determined for the smallest cash-generating unit it belongs to.
Which assets, and when to test
IAS 36 is not a valuation rule for every balance. It excludes inventories, financial assets within IFRS 9, deferred tax assets, contract assets under IFRS 15, investment property measured at fair value and other specified classes (IAS 36, paragraphs 2 to 5). For assets in scope, the entity assesses at the end of each reporting period whether there is any indication of impairment. Examples include adverse market changes, obsolescence, physical damage, an asset becoming idle and performance worse than budgeted. If an indicator exists, estimate recoverable amount (paragraphs 8 to 14).
Some assets are tested annually whether or not there is an indicator: intangibles with indefinite useful lives, intangibles not yet available for use and goodwill acquired in a business combination (paragraphs 10 to 11). An indicator starts the test. It does not set the write-down, and an idle asset can still be worth its carrying amount.
Ordnance Survey's 2025/26 annual report, published in July 2026, sets out a policy in note 1.9 describing an indicator review, recoverable amount and grouping assets into cash-generating units. It is one company's policy disclosure, not evidence that every asset needs a full discounted cash flow valuation each year.
Test the right unit
Recoverable amount is the higher of fair value less costs of disposal and value in use. Value in use is the present value of the future cash flows expected from the asset. If either measure exceeds carrying amount, there is no impairment and the other need not be calculated (paragraphs 6, 18 to 22 and 30). Never use the lower of the two.
Estimate recoverable amount for the individual asset where its cash inflows are largely independent of other assets. Where they are not, recoverable amount is normally determined for the smallest cash-generating unit to which the asset belongs. The exceptions are narrow. For example, no wider test is needed if the asset's own fair value less costs of disposal already exceeds its carrying amount (paragraphs 6, 19, 22 and 66 to 68). A machine in the middle of a production line usually cannot be valued alone, and a whole department cannot be pooled simply to absorb a weak asset.
Value in use forecasts need reasonable and supportable assumptions, with greater weight on external evidence. They reflect the asset in its current condition and exclude uncommitted restructurings and future enhancements (paragraphs 33 and 44). Those restrictions belong to value in use. Fair value less costs of disposal is measured on its own basis.
Sources and context, checked :
A hypothetical idle machine
This example is hypothetical and uses generic currency units. A standalone machine under the cost model has independently identifiable cash inflows, and there is no goodwill, tax effect or revaluation. Its carrying amount is 100,000, with four years of life remaining and nil residual value. Value in use is assumed at 88,000, already discounted from supported cash flows for the machine in its current condition. It is not an undiscounted total.
The journal is Dr impairment loss 12,000, Cr accumulated impairment 12,000, recognised immediately in profit or loss. Future depreciation uses the revised carrying amount: 88,000 ÷ 4 = 22,000 a year (paragraphs 59 to 63). Revalued assets follow different rules and are outside this example.
Suppose that one year later the carrying amount is 66,000 and a qualifying change in estimates raises recoverable amount to 95,000. Without the impairment, the machine would have carried 100,000 less one year's 25,000 of depreciation, or 75,000. A reversal is capped at that figure, so the carrying amount rises by 9,000 to 75,000, not to 95,000. Goodwill impairment is never reversed (paragraphs 114, 117 and 124).
| Hypothetical measure | Amount |
|---|---|
| Carrying amount | 100,000 |
| Fair value | 82,000 |
| Less incremental costs of disposal | (7,000) |
| Fair value less costs of disposal | 75,000 |
| Value in use, discounted | 88,000 |
| Recoverable amount, the higher of the two | 88,000 |
| Impairment loss | 12,000 |
Sources and context, checked :
Keep an indicator log
We suggest an indicator log tied to asset IDs, recording the operational evidence, its date and an owner. Before valuing anything, document scope and whether the asset's cash inflows are independent. Reconcile the tested carrying amounts to the ledger and the fixed asset register. Keep the market and disposal cost evidence, the approved current-condition forecast and the discount rate rationale. We also suggest a sensitivity on the input most likely to remove the headroom. That is our recommendation, not a requirement for every machine. Record the conclusion, journal, revised depreciation and the date of the next indicator and reversal review.
A full goodwill and cash-generating unit allocation, corporate assets and impairment disclosures need separate work.
This close
Pick the idle or worst-performing material asset. Write down the indicator, decide whether the asset is tested alone or within a cash-generating unit, and check whether a supported fair value less costs of disposal already exceeds its carrying amount before building a value in use model.