Ind AS 36 Impairment: When and How to Write Down an Asset
- Under Ind AS 36, you must write down an asset whenever its carrying amount exceeds what you can recover from using or selling it.
- The recoverable amount is the higher of Fair Value Less Costs of Disposal and Value in Use — you pick whichever is greater.
- Impairment is not optional accounting housekeeping; missing it can misstate your balance sheet and attract auditor qualifications.
If a machine on your books is worth ₹50 lakh but will realistically earn or fetch only ₹32 lakh, Indian accounting standards say you must write it down — immediately. That is the core idea behind Ind AS 36 Impairment. This standard tells you when to check whether an asset has lost value, how to measure that loss, and exactly how to record it in your books. Get it wrong and your balance sheet overstates assets, which misleads lenders, investors, and the taxman.
Which Assets Does Ind AS 36 Cover?
Ind AS 36 applies to most non-financial assets — property, plant and equipment, intangible assets, right-of-use assets, goodwill, and investments in subsidiaries or associates carried at cost. It does not apply to inventories (covered by Ind AS 2), deferred tax assets, financial assets under Ind AS 109, or investment property measured at fair value.
If you are a manufacturing company with heavy plant and machinery, or a tech firm sitting on large intangibles and goodwill from an acquisition, Ind AS 36 is squarely aimed at you.
When Must You Test for Impairment?
The standard draws a clear line between assets you test every year and assets you test only when there is a trigger.
- Mandatory annual test (no trigger needed): Goodwill acquired in a business combination, intangible assets with an indefinite useful life, and intangible assets not yet available for use.
- Trigger-based test (all other assets): You test only when an indicator of impairment exists at the reporting date.
Common triggers you should watch for:
- A significant fall in the asset's market value beyond normal wear and tear
- A rise in market interest rates that would reduce the discount rate used in your Value in Use calculation
- The carrying amount of net assets exceeds the company's market capitalisation
- Physical damage or obsolescence (a factory fire, a product line discontinued)
- Worse-than-expected operating results from the asset or the cash-generating unit (CGU) it belongs to
Key Concepts You Must Understand
| Term | Plain-English Meaning | How It Is Measured |
|---|---|---|
| Carrying Amount | What the asset is currently shown at in your books | Cost minus accumulated depreciation minus any prior impairment |
| Recoverable Amount | What you can actually get from the asset | Higher of FVLCD and Value in Use |
| Fair Value Less Costs of Disposal (FVLCD) | What a willing buyer would pay, minus selling costs | Market price or valuation, less brokerage, legal fees, dismantling costs |
| Value in Use (VIU) | Present value of future cash flows the asset will generate for you | Discounted cash flow model using a pre-tax discount rate |
| Impairment Loss | The amount by which carrying amount exceeds recoverable amount | Carrying Amount minus Recoverable Amount |
| Cash-Generating Unit (CGU) | The smallest group of assets that generates cash independently | Identified by tracing independent cash inflows |
Step-by-Step: How to Calculate and Record Impairment
Follow these five steps every time you identify a trigger:
- Identify the asset or CGU. If cash flows cannot be attributed to one asset alone, group assets into a CGU.
- Find the FVLCD. Get a market quotation or an independent valuation, then deduct incremental disposal costs.
- Calculate Value in Use. Project future pre-tax cash flows, then discount them at a pre-tax rate that reflects current market assessments of the time value of money and asset-specific risks.
- Take the higher of FVLCD and VIU as the Recoverable Amount.
- If Recoverable Amount is less than Carrying Amount, book the difference as an impairment loss — debit Impairment Loss (P&L) and credit the asset account (or Accumulated Impairment Loss).
Worked Example With Real Numbers
Ramesh Fabricators Pvt. Ltd. owns a CNC machine. Here is the situation at 31 March 2027:
- Original cost: ₹48,00,000
- Accumulated depreciation to date: ₹16,00,000
- Carrying Amount: ₹32,00,000
A new competing technology has made the machine partly obsolete. Ramesh's finance team runs the numbers:
- FVLCD: A dealer offers ₹18,00,000 for the machine. Legal and dismantling costs are ₹1,20,000. FVLCD = ₹18,00,000 − ₹1,20,000 = ₹16,80,000.
- Value in Use: The machine will generate net pre-tax cash flows of ₹6,00,000 per year for the next four years, then ₹2,00,000 in year five (terminal year). Discounted at a pre-tax rate of 12%, the present value works out to approximately ₹20,40,000. (Year 1: ₹5,35,714 + Year 2: ₹4,78,316 + Year 3: ₹4,27,068 + Year 4: ₹3,81,311 + Year 5: ₹1,13,485 ≈ ₹19,35,894 — call it ₹19,36,000 after rounding.)
Recoverable Amount = Higher of ₹16,80,000 and ₹19,36,000 = ₹19,36,000
Impairment Loss = ₹32,00,000 − ₹19,36,000 = ₹12,64,000
Ramesh must debit Impairment Loss ₹12,64,000 to the Profit and Loss account and reduce the machine's carrying amount to ₹19,36,000. Future depreciation is now calculated on this lower base. You can cross-check the revised depreciation charge using KyaTax's Depreciation Calculator once the new carrying amount is locked in.
Allocating Impairment to a CGU (Including Goodwill)
When the impairment test is at the CGU level, any impairment loss reduces assets in this strict order:
- First, write down goodwill allocated to that CGU to zero.
- Then, reduce the carrying amount of the remaining assets pro rata based on their individual carrying amounts — but do not reduce any asset below the highest of its FVLCD, its VIU, or zero.
This order matters. Goodwill has no independent market value, so it absorbs losses first.
Reversing an Impairment Loss
Circumstances sometimes improve. Ind AS 36 allows reversal of an impairment loss if the recoverable amount later increases — but only for assets other than goodwill. Goodwill impairment is permanent and cannot be reversed.
When you reverse, you increase the carrying amount, but never above what it would have been had the impairment never been recognised (i.e., cost minus normal depreciation). The reversal goes through the Profit and Loss account unless the asset was previously revalued under Ind AS 16, in which case the reversal goes to Other Comprehensive Income up to the revaluation surplus.
Common Mistakes
- Using post-tax cash flows with a post-tax rate and thinking it balances out. Ind AS 36 requires a pre-tax discount rate applied to pre-tax cash flows. Mixing conventions produces an incorrect VIU.
- Skipping the CGU concept for goodwill. Companies often test goodwill as a standalone asset. Goodwill cannot generate cash independently — it must be allocated to a CGU or group of CGUs and tested at that level.
- Including financing cash flows in VIU projections. The discount rate already captures the cost of capital. If you also subtract interest payments from your projected cash flows, you are double-counting the financing cost.
- Not updating the discount rate each year. Many companies freeze the rate used at acquisition. The standard requires a current market rate. As RBI repo rates and market conditions change, your discount rate must be refreshed.
- Forgetting to reassess impairment triggers at every year-end. An impairment test done once is not a permanent certificate of health. If new triggers arise — a key customer lost, a regulatory ban on the product — a fresh test is mandatory before the next balance sheet date.
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Open Depreciation Calculator →Frequently asked questions
Does Ind AS 36 apply to all companies in India?
Ind AS 36 applies to companies that follow Indian Accounting Standards — broadly, listed companies, large unlisted public companies, and their subsidiaries, as notified by the Ministry of Corporate Affairs. Companies still on older Indian GAAP (Schedule III without Ind AS) follow AS 28 instead, which has similar principles but some differences in detail.
Is impairment loss deductible for income tax purposes?
Generally, no. An impairment loss recognised under Ind AS 36 is a book entry and is not an allowable deduction under the Income Tax Act, 1961. Tax depreciation continues to be governed by the rates and rules under the IT Act, independent of the accounting write-down.
How often must goodwill be tested for impairment?
Goodwill must be tested for impairment at least once every year, regardless of whether any trigger exists. You may perform this test at any time during the year, provided you do it at the same time every year. If indicators of impairment appear mid-year, you test immediately, not just at year-end.
What discount rate should we use for Value in Use calculations?
Ind AS 36 requires a pre-tax discount rate that reflects current market assessments of the time value of money and risks specific to the asset. In practice, companies often derive this from the Weighted Average Cost of Capital (WACC) adjusted to a pre-tax basis, cross-checked against observable rates in the market for similar assets or businesses.
General information for FY 2026-27, not professional advice for your specific case. Rules change — verify against the latest notification or ask a KyaTax expert.
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