Impairment Testing Under Ind AS 36: A Practical Governance Guide

Impairment testing under Ind AS 36 asks whether an asset or cash-generating unit (CGU) is carried above its recoverable amount. Recoverable amount is the higher of value in use and fair value less costs of disposal. If carrying amount exceeds it, an impairment loss is recognised under the standard. The difficult work is not the final comparison: it is identifying indicators and CGUs, controlling forecasts, applying consistent assumptions and documenting challenge before reporting deadlines.

Start with timely impairment indicators

At each reporting date, assess whether there is an indication that assets may be impaired. External signals can include adverse market, technology, regulatory or economic changes, increases in market returns affecting discount rates, or market capitalisation below net assets. Internal signals include obsolescence, damage, restructuring, worse-than-expected performance, idle capacity or plans to discontinue an operation.

Goodwill acquired in a business combination, indefinite-life intangibles and intangibles not yet available for use are subject to annual testing requirements under Ind AS 36, with additional testing when indicators exist. Do not defer analysis because annual budget season is incomplete. A trigger log owned jointly by finance and operations should capture evidence throughout the year.

Identify CGUs consistently

When an individual asset does not generate cash inflows largely independent from other assets, test the smallest identifiable group generating largely independent inflows. CGUs might be a plant, product line, store network or business operation depending on how customers and assets generate cash—not simply management’s preferred reporting segment.

Apply the definition consistently between periods unless a justified change is supportable. Map revenue, shared assets, corporate costs, working capital and liabilities to each CGU. For an integrated manufacturer, one plant may supply another, so transfer pricing, internal demand and the existence of an active market require careful analysis.

Goodwill must be allocated to the CGU or groups of CGUs expected to benefit from combination synergies, within the limits specified by the standard. The allocation should be completed and governed after acquisition; waiting until performance weakens invites hindsight.

Build the carrying amount on a comparable basis

The carrying amount tested must correspond to the assets and liabilities whose cash flows are included in recoverable amount. Reconcile it to the general ledger and address working capital, leases, corporate assets and recognised liabilities consistently.

Do not compare enterprise-level cash flows with an equity carrying amount or omit assets that support the forecast. Deferred tax and financing items require treatment under the applicable Ind AS logic. Preserve a bridge from prior period showing additions, depreciation, amortisation, disposals, foreign exchange and allocation changes.

Value in use: entity-specific but constrained

Value in use is the present value of future cash flows expected from continuing use and ultimate disposal. Cash-flow projections should be based on reasonable, supportable assumptions and the most recent budgets or forecasts approved by management. Ind AS 36 contains specific requirements concerning forecast periods, extrapolation and the cash flows that may be included.

A practical model should reconcile to the approved plan but need not accept it unchallenged. Compare prior forecasts with actual results, order books with revenue, capacity with volume, and planned margins with procurement, labour and energy evidence. For manufacturers, test maintenance capex, yield, downtime and working capital. EBITDA is not cash flow.

Exclude cash flows from future restructurings to which the entity is not yet committed and from improving or enhancing asset performance where the standard requires. Include spending needed to maintain current performance. Apply a discount rate consistent with the cash flows and Ind AS 36 requirements, avoiding double counting risks. When using post-tax modelling as an operational technique, ensure the required measurement and disclosures remain compliant.

Beyond the detailed budget period, extrapolate using a supportable steady or declining growth rate unless an increasing rate is justified. Currency, inflation and discount-rate assumptions must align.

Fair value less costs of disposal

Fair value less costs of disposal (FVLCD) reflects a market-participant exit price under Ind AS 113, less direct incremental disposal costs as applicable. It may use quoted prices, market transactions, multiples or a DCF with market-participant assumptions. It is not simply management’s value-in-use model relabelled.

Identify the unit of account, principal or most advantageous market as applicable, highest and best use for relevant non-financial assets, and observable versus unobservable inputs. Disposal costs are not the same as debt or income tax. A realistic sale scenario may require specialist market evidence.

Because recoverable amount is the higher of VIU and FVLCD, it may be unnecessary to compute both when one clearly exceeds carrying amount. Document why the uncalculated measure cannot change the conclusion.

Allocate any impairment loss correctly

For a CGU, an impairment loss is allocated first to goodwill and then to other assets on a pro-rata basis, subject to the floors and requirements in Ind AS 36. After recognition, future depreciation or amortisation changes.

Reversals are assessed when estimates improve, but impairment of goodwill is not reversed. Other reversals are constrained so an asset is not carried above the amount that would have existed without prior impairment. The accounting team should determine presentation, tax and disclosure consequences.

Sensitivity and headroom

Headroom is recoverable amount less carrying amount; it is not a risk assessment by itself. Show sensitivity to volume, price, margin, capex, working capital, terminal growth and discount rate. Calculate reasonably possible changes that would eliminate headroom where relevant to disclosures.

Use coherent scenarios. A demand shock may lower utilisation, worsen margins and delay capex, while an interest-rate change may alter discount rates and financing conditions. Reverse stress tests reveal which assumption drives the conclusion. Compare implied values with market capitalisation and transaction evidence; explain, rather than ignore, contradictions.

Audit committee governance

The committee should receive a concise paper stating indicators, CGU structure, goodwill allocation, carrying amounts, method, forecast provenance, major assumptions, sensitivities, prior-year accuracy and disclosure implications. Separate model preparation, management ownership and independent review. Lock files and retain source evidence.

Challenge optimistic asymmetry: budgets used for bonuses, lender cases and impairment should reconcile or explain differences. Late model changes need approval and an audit trail. The February 2026 ICAI educational material provides current implementation support, but entity-specific accounting conclusions remain the responsibility of management and auditors.

An effective process can also expose operational priorities before value is lost. Our financial reporting valuation services and governance insights help turn impairment testing into an evidence-led board discussion.