Asset impairment is a situation in which the usefulness of an asset suddenly declines, making it so expensive to
maintain that it can no longer be expected that it will pay for itself through future cash flows. A company can
choose to maintain the asset on its books but write down the value to more accurately reflect its value, or it can
list the asset for sale and dispose of it. Once an asset is impaired, it cannot be recovered. Therefore, companies
should test assets before placing them in this category.
IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their
recoverable amount (i.e. the higher of fair value less costs of disposal and value in use). With the exception of
goodwill and certain intangible assets for which an annual impairment test is required, entities are required to
conduct impairment tests where there is an indication of impairment of an asset. The test may be conducted at
the asset level or for a 'cash-generating unit.'
What is impairment?
If the recoverable amount of an asset is less than the assets carrying amount:
The asset is impaired
The assets carrying amount should be reduced to the recoverable amount
Asset B
Cost
1000
1000
Accumulated Reserve
400
400
Carrying Amount
600
600
Recoverable Amount
900
400