Impairment of assets explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
An asset is impaired when its carrying amount is more than the amount that can be recovered from it (paragraph 8). Ind AS 36 tells a company when to test, how to measure what is recoverable, how to carry the test to a cash-generating unit (CGU) when assets work together, and how to share any loss, starting with goodwill. This guide covers each step and reconciles a loss and a later partial reversal.
Test whenever there is an indication of impairment, and every year for goodwill and for indefinite-life or not-yet-available intangibles (paragraphs 9 and 10). Compare the carrying amount with the higher of fair value less costs of disposal and value in use (paragraph 18). A CGU loss goes first to goodwill, then pro rata to the other assets, never below an asset's own floor (paragraphs 104 and 105). A goodwill loss is never reversed (paragraph 124).
Ind AS as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015). Amendments notified after 1 April 2025 are not reflected in this article and should be checked on mca.gov.in. Impairment tests are a core part of the year-end work in virtual CFO services for Ind AS groups.
What the paragraphs require
| Paragraph | Requirement | What it means in practice |
|---|---|---|
| 9, 12-14 | Assess at each reporting date for indications, as a minimum those in paragraph 12 (external, internal, dividend from a subsidiary) | Falling market value of the business, idle assets and budget shortfalls are triggers |
| 10 | Annual test for goodwill and indefinite-life or not-yet-available intangibles | Do it at the same time every year |
| 18-19 | Recoverable amount = higher of fair value less costs of disposal and value in use; if either exceeds carrying amount, no loss | You need not compute both |
| 30-33, 39-44 | Value in use: cash flows from approved budgets, normally up to five years, then a steady or declining growth rate; exclude future restructuring and enhancement | Use the asset in its current condition |
| 50-51, 55 | Pre-tax cash flows, excluding financing and tax, discounted at a pre-tax rate reflecting time value and asset-specific risks | Do not count a risk twice |
| 59-61 | Loss recognised immediately in profit or loss, or against a revaluation surplus | Treat as a revaluation decrease for revalued assets |
| 66-68, 74-76 | Recoverable amount of the CGU: the smallest group generating largely independent cash inflows | Recognised liabilities are normally left out of its carrying amount |
| 80, 90 | Allocate goodwill to CGUs expected to benefit; test the CGU including goodwill | Annual test |
| 104-105 | Loss: goodwill first, then pro rata; no asset below the highest of fair value less costs of disposal, value in use and zero | Excess is reallocated to the other assets |
| 110-117, 122-124 | Reverse only on a change in estimates, capped at carrying amount had no loss occurred; pro rata for a CGU; never for goodwill | Passage of time alone is not a reversal (paragraph 116) |
Companies that apply AS rather than Ind AS follow a separate standard, covered in our AS 28 guide; the standard is outlined in Ind AS 36 Impairment of Assets.
The method
- Identify indications, or the annual-test items.
- Identify the CGU (paragraphs 66 to 70) and allocate goodwill to it (paragraph 80).
- Compute the carrying amount of the CGU, including goodwill and excluding recognised liabilities (paragraph 76).
- Estimate value in use: pre-tax cash flows for the budget period, extrapolation, discounting.
- Estimate fair value less costs of disposal if value in use falls short of the carrying amount (paragraph 19). For fair value measurement, see our Ind AS 113 guide.
- Recoverable amount is the higher; any shortfall is the loss.
- Allocate: goodwill, then pro rata, with the floor.
- Recognise in profit or loss (or OCI for revalued assets), adjust future depreciation (paragraph 63) and consider deferred tax (paragraph 64).
Worked example
The entity and all figures in this example are invented for illustration.
Kosi Packaging Limited tests its Bagmati unit, a CGU to which goodwill of Rs 150 lakh from an acquisition was allocated. At 31 March Year 3 carrying amounts (Rs lakh) are: goodwill 150, plant 400, building 200, software 100: total 850. The market has turned sharply against the unit, an indication under paragraph 12(b).
Value in use (paragraphs 30 to 33, 39, 50, 55). Pre-tax net cash flows from the approved five-year budget, including net disposal proceeds in year 5, discounted at a pre-tax rate of 12 per cent a year (assumed, for arithmetic only). Factors are rounded to four decimals for display; present values use unrounded factors and are rounded to Rs 0.01 lakh.
| Year | Cash flow (Rs lakh) | Factor at 12% | Present value (Rs lakh) |
|---|---|---|---|
| 1 | 150 | 0.8929 | 133.93 |
| 2 | 170 | 0.7972 | 135.52 |
| 3 | 190 | 0.7118 | 135.24 |
| 4 | 200 | 0.6355 | 127.10 |
| 5 | 210 | 0.5674 | 119.16 |
| Value in use | 650.95 |
Fair value less costs of disposal (paragraphs 18 and 28). A market participant would pay Rs 640 lakh; costs of disposal are Rs 20 lakh, so the figure is Rs 620 lakh. Recoverable amount is the higher: Rs 650.95 lakh.
Loss (paragraph 59). 850.00 - 650.95 = Rs 199.05 lakh.
Allocation (paragraphs 104 and 105). Goodwill takes Rs 150.00 lakh first. The remaining Rs 49.05 lakh goes pro rata to plant, building and software on carrying amounts of 400, 200 and 100. The building has a measurable fair value less costs of disposal of Rs 190 lakh, so it cannot be cut by more than Rs 10 lakh; the excess is reallocated to plant and software in the ratio 400 to 100.
| Asset | Carrying amount (Rs lakh) | First pass (Rs lakh) | Floor adjustment (Rs lakh) | Final loss (Rs lakh) | After loss (Rs lakh) |
|---|---|---|---|---|---|
| Goodwill | 150.00 | 150.00 | 150.00 | nil | |
| Plant | 400.00 | 28.03 | +3.21 | 31.24 | 368.76 |
| Building | 200.00 | 14.01 | -4.01 (limited to 10.00) | 10.00 | 190.00 |
| Software | 100.00 | 7.01 | +0.80 | 7.81 | 92.19 |
| Total | 850.00 | 199.05 | 199.05 | 650.95 |
| Particulars | Debit (Rs lakh) | Credit (Rs lakh) |
|---|---|---|
| Impairment loss (profit or loss) | 199.05 | |
| To Goodwill | 150.00 | |
| To Plant | 31.24 | |
| To Building | 10.00 | |
| To Software | 7.81 |
Check. 150.00 + 31.24 + 10.00 + 7.81 = 199.05, and the carrying amounts after the loss total 650.95, equal to recoverable amount.
Reversal one year later (paragraphs 110, 114, 117, 122 and 123). Remaining lives at 31 March Year 3 are plant 8 years, building 20 years and software 4 years, all straight line to nil. After one year of depreciation on the reduced amounts, carrying amounts are plant 322.66, building 180.50, software 69.14: total 572.30 (goodwill is nil and is not reversed). Had no loss occurred, they would have been plant 350.00, building 190.00 and software 75.00 (the caps under paragraph 117). Because of an improved budget, the recoverable amount of the unit at 31 March Year 4 is estimated at Rs 610.00 lakh (assumed), so the reversal needed is 610.00 - 572.30 = Rs 37.70 lakh.
| Asset | Carrying amount (Rs lakh) | Pro rata share (Rs lakh) | Cap room (Rs lakh) | Final reversal (Rs lakh) | After reversal (Rs lakh) |
|---|---|---|---|---|---|
| Plant | 322.66 | 21.26 | 27.34 | 23.22 | 345.88 |
| Building | 180.50 | 11.89 | 9.50 | 9.50 | 190.00 |
| Software | 69.14 | 4.55 | 5.86 | 4.98 | 74.12 |
| Total | 572.30 | 37.70 | 37.70 | 610.00 |
The building hits its cap, and the Rs 2.39 lakh it cannot take is shared by plant and software in the ratio 322.66 to 69.14 (paragraph 123). The reversal is recognised in profit or loss (paragraph 119): debit plant 23.22, building 9.50, software 4.98; credit reversal of impairment loss 37.70.
Presentation and disclosure
Paragraphs 126 to 133 set out the disclosures for impairment losses and reversals by class of asset and for CGUs, and paragraphs 134 to 137 add requirements for CGUs holding goodwill or indefinite-life intangibles, including the key assumptions behind recoverable amount. Deferred tax on the revised carrying amount follows deferred tax under Ind AS 12. Where the goodwill arose from a combination, see business combinations under Ind AS 103.
Common mistakes
- Using post-tax cash flows or a post-tax rate with a pre-tax test (paragraphs 50 and 55).
- Including cash flows from a restructuring not yet committed to, or from enhancing the asset (paragraph 44).
- Writing assets down in proportion to goodwill instead of taking goodwill first.
- Letting an asset fall below its own fair value less costs of disposal (paragraph 105).
- Reversing goodwill impairment, or reversing a loss only because the discount unwound (paragraph 116).
- Forgetting to revisit useful life and depreciation after a loss (paragraph 63).
Need help with impairment testing?
A defensible impairment test needs a budget the auditor accepts, a discount rate that is built up, and a clear CGU map. Our team can build and document the model as part of virtual CFO services, including the allocation workings.
Key takeaways
- Annual goodwill test, plus tests wherever indications exist.
- Recoverable amount is the higher of fair value less costs of disposal and value in use.
- Value in use uses pre-tax cash flows, a pre-tax rate and no future restructuring.
- Loss: goodwill first, then pro rata, with each asset's floor.
- Reverse losses for assets other than goodwill only when estimates change, up to the no-impairment carrying amount.
Read next
- Property, plant and equipment under Ind AS 16: component depreciation, revaluation and decommissioning
- Fair value measurement under Ind AS 113: three-level hierarchy, worked
- Business combinations under Ind AS 103: acquisition method, goodwill and NCI
- AS 28 Impairment of Assets for non-Ind AS companies
Disclaimer: Based on the Indian Accounting Standards as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015) and, where named, the ITFG clarification bulletins of ICAI, as consulted on 4 October 2026. The worked example uses invented figures. Amendments notified after 1 April 2025 should be checked on mca.gov.in. This article is general information, not legal advice; check the official text before acting.