Impairment Testing (Ind AS 36)
Ind AS 36 requires companies to test assets — particularly goodwill and intangibles with indefinite useful lives — for impairment annually and whenever there is an indication of impairment, comparing the asset's carrying amount to its recoverable amount (higher of fair value less costs of disposal and value in use).
Impairment testing under Ind AS 36 ensures that assets on the balance sheet are not overstated relative to the economic benefits they are expected to generate. Unlike depreciation (which allocates cost over useful life mechanically), impairment is event-driven and requires management judgment — making it a frequent area of accounting scrutiny.
The recoverable amount is the higher of: (a) fair value less costs of disposal (the price an asset could be sold for in an arm's length transaction, minus selling costs) and (b) value in use (VIU), which is the present value of future cash flows expected from the asset, discounted at a pre-tax rate reflecting asset-specific risk. When the recoverable amount falls below the carrying amount, an impairment loss equal to the difference is recognised in the income statement.
For goodwill (arising from business combinations), Ind AS 36 prohibits reversal of impairment once recognised — unlike impairment of other assets, which may be reversed if circumstances change. Goodwill is also not amortised under Ind AS (unlike earlier Indian GAAP, which required amortisation over 20 years). This creates ongoing annual impairment testing obligations for any company that grew through acquisitions.
The concept of the cash-generating unit (CGU) is central to Ind AS 36 implementation. A CGU is the smallest identifiable group of assets generating cash inflows that are largely independent of other assets. Goodwill is allocated to CGUs that benefit from the business combination synergies. Testing impairment at CGU level prevents companies from offsetting impaired assets against unimpaired ones.
Several high-profile Indian impairment disclosures attracted investor attention. Tata Steel recognised cumulative impairment of several thousand crore rupees on its European (Corus) steel operations across multiple financial years as the business struggled with structural challenges in European steel markets. Bharti Airtel recognised substantial goodwill impairment on its African operations (Airtel Africa) as telecom market conditions in sub-Saharan Africa deteriorated. These impairments reduced reported book value but in many cases represented economically recognised losses on historical capital allocation decisions.