impairmenttoets

Impairmenttoets, or impairment test, is the process in financial reporting used to determine whether the carrying amount of an asset or a cash-generating unit (CGU) exceeds its recoverable amount. The test is a central requirement of IAS 36 Impairment of Assets under IFRS and applies to tangible assets, intangible assets, and goodwill. In practice, impairmenttoets is performed when there are indicators of impairment or, for assets with indefinite useful lives and for goodwill, at least annually.

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 expected future cash flows from the asset or CGU, discounted at a rate reflecting the time value of money and asset-specific risks. If the recoverable amount is less than the carrying amount, an impairment loss is recognized in profit or loss and the asset’s carrying amount is reduced to the recoverable amount. Impairment losses are typically allocated to assets within the CGU on a pro rata basis.

Reversals of impairment losses are possible for most assets if the recoverable amount subsequently increases, but impairment losses for goodwill are not reversible under IFRS. The impairmenttoets relies on both external indicators (such as market declines or adverse economic conditions) and internal indicators (such as obsolescence or physical damage). The process often requires identification of the smallest CGU that can generate independent cash inflows and careful estimation of future cash flows and discount rates.