Valuation for Impairment Testing : Guide under Ind AS 36

Valuation for Impairment Testing – A Comprehensive Guide under Ind AS 36

• In today’s dynamic business environment, assets may lose value due to market disruptions, technological changes, economic slowdowns, regulatory developments, or operational inefficiencies. Financial reporting standards therefore require entities to ensure that assets are not carried in the books at amounts exceeding their recoverable values. This is where Ind AS 36 – Impairment of Assets assumes critical importance.
• Impairment testing is not merely an accounting compliance exercise; it is a strategic valuation process involving financial forecasting, risk assessment, discount rate determination, and cash flow evaluation. Proper impairment assessment enhances transparency, strengthens investor confidence, and ensures fair presentation of financial statements.

What is impairment under Ind AS 36?

An asset is considered impaired when its carrying amount exceeds its recoverable amount. In such cases, the entity must recognize an impairment loss in its financial statements.

The standard defines:

• Recoverable Amount = Higher of Fair Value Less Costs of Disposal (FVLCD), or Value in Use (VIU)
• Ind AS 36 applies to most non-financial assets, including Property, Plant & Equipment; Intangible Assets; Goodwill; and Investments in Subsidiaries, Associates, and Joint Ventures in separate financial statements. However, inventories, financial instruments, deferred tax assets, biological assets, and assets held for sale are excluded from its scope.

Importance of Impairment Testing

• Impairment testing ensures Assets are not overstated, Losses are recognized timely, Financial statements reflect economic reality, Investors receive reliable information and Management reassesses operational performance periodically
• With increasing economic volatility and rapid technological disruptions, impairment testing has become a major area of auditor focus and regulatory scrutiny.

Identifying Indicators of Impairment

Ind AS 36 requires entities to assess at each reporting date whether indicators of impairment exist.

External Indicators

Some important external indicators include Significant decline in market value, Adverse technological or economic changes, an increase in market interest rates and Market capitalization lower than net assets

Internal Indicators

Internal indicators may include obsolescence or physical damage, poor operating performance, idle assets or restructuring plans, and negative internal cash flow trends. Notably, goodwill and indefinite-life intangible assets must be tested annually, irrespective of impairment indicators.

Measuring Recoverable Amount

1. Fair Value Less Costs of Disposal (FVLCD) :

This represents the price obtainable from selling the asset in an orderly transaction between market participants, less disposal costs.

Valuation Approaches under Ind AS 113 : Entities may apply Market Approach, Cost Approach and Income Approach. The selection depends on asset nature and data availability.

2. Value in Use (VIU):

Value in Use is the present value of future cash flows expected from the continuing use of an asset or Cash-Generating Unit (CGU).  The VIU model typically involves Forecasting future cash inflows, estimating operating outflows, determining terminal value and applying an appropriate discount rate. This is often the more complex and judgment-intensive area of impairment testing.

Future Cash Flow Projections: Ind AS 36 prescribes specific principles regarding cash flow estimates.

Cash Flows to Include Entities should include cash inflows from continuing use, necessary operating outflows, disposal proceeds at end of useful life and maintenance capital expenditures.

Cash Flows to Exclude: The following are specifically prohibited: future uncommitted restructurings, financing cash flows, Income tax cash flows and Future enhancement expenditures unless already committed. Cash flow projections should generally be based on approved budgets for a maximum period of five years unless a longer period can be justified.

Discount Rate – The Core Valuation Judgment The selection of a discount rate significantly impacts impairment valuation. Ind AS 36 requires use of a:

Pre-tax discount rate reflecting market assessments of time value and asset-specific risks.

Entities commonly use Weighted Average Cost of Capital (WACC), CAPM methodology and Incremental borrowing rates and The discount rate must Reflect market participant assumptions, avoid double-counting risks and remain independent of financing structure

Cash-Generating Units (CGUs)

Often, individual assets do not generate independent cash flows. In such cases, impairment testing is performed at the CGU level. A CGU is “the smallest identifiable group of assets generating largely independent cash inflows.” Determining CGUs requires considerable judgment and depends on internal management monitoring, operational structure, and independent revenue generation patterns.

Principle of Cash-Generating Units (CGUs)

The carrying amount of a CGU should comprise only those assets that Directly belong to the CGU, or Can be allocated to the CGU on a reasonable and consistent basis, and Contribute to generating the future cash flows considered in the Value in Use (VIU) calculation.  Liabilities are generally not included in the CGU carrying amount unless the recoverable amount cannot be determined without considering those liabilities.

Treatment of Specific Items

1. Corporate Assets: Examples include head office building, common IT infrastructure, and Shared research facilities. Treatment: Included in the CGU carrying amount if they can be allocated on a reasonable and consistent basis.
2. Deferred Tax Assets (DTA): Examples include brought-forward business losses and absorbed depreciation benefits and treatment of excluded from CGU carrying amount. Reason: Deferred tax assets are based on the entity’s overall tax position and are not attributable to a specific CGU’s operating cash flows. Therefore, exclude DTA from the carrying amount, Exclude DTA from recoverable amount calculation.
3. Decommissioning Liability: Examples: Mine closure obligations, Asset restoration costs, Environmental remediation obligations Normal Rule: Exclude the liability from CGU carrying amount. Exception: If a buyer acquiring the CGU would necessarily assume the decommissioning obligation, then deduct liability from the CGU’s carrying amount and deduct the corresponding obligation from the value in use calculation as well. This maintains consistency between carrying amount and recoverable amount. The same liability must also be reflected in estimating the recoverable amount.
4. Pension Obligation: Examples: Defined benefit gratuity obligations and pension liabilities. Treatment: Deduct from the carrying amount if the recoverable amount has been determined after considering the pension obligation. Logic : A CGU’s carrying amount and recoverable amount should be comparable. If pension liabilities are factored into the valuation/recoverable amount, then the carrying amount should also reflect them.

Practical Summary

Item	Include in CGU?
Plant & Machinery	Yes
Working Capital Assets	Yes (where relevant)
Allocable Corporate Assets	Yes
Goodwill Allocated to CGU	Yes
Deferred Tax Assets	No
General Borrowings	No
Pension Obligation	Depending on valuation approach
Decommissioning Liability	Generally, no; include only when assumed by buyer
Income Tax Liability	No

The most common error in impairment testing includes entity-level items such as deferred tax assets, corporate liabilities, and financing liabilities within the CGU carrying amount. Under Ind AS 36, only those assets and liabilities that are directly linked to the CGU’s cash flows should be considered, ensuring consistency between the carrying amount and the recoverable amount

Goodwill Impairment

Goodwill arising from business combinations must be allocated to CGUs expected to benefit from acquisition synergies. Key principles include Mandatory annual impairment testing, testing at the lowest monitored level, and no reversal of goodwill impairment permitted under Ind AS 36. This prohibition distinguishes Ind AS 36 from earlier Indian GAAP practices.

Recognition and Allocation of Impairment Loss

When impairment arises at the CGU level, goodwill is reduced first, and the remaining loss is allocated proportionately among CGU assets. However, asset values cannot be reduced below: Fair value less costs of disposal, value in use and zero. This ensures impairment allocation remains commercially reasonable.

Reversal of Impairment

Ind AS 36 permits reversal of impairment losses for assets other than goodwill if assumptions underlying prior impairment have changed. However, Reversal is capped at original carrying amount adjusted for depreciation and Goodwill impairment reversal is strictly prohibited

Disclosure Requirements

Ind AS 36 contains extensive disclosure obligations aimed at enhancing transparency. Entities must disclose Amount of impairment losses/reversals, events triggering impairment, key assumptions used, discount rates applied, growth assumptions, and sensitivity analysis for key CGUs. Disclosure quality is increasingly becoming a focus area for auditors and regulators alike.

Highlights the fundamental differences between the two methods used to determine the Recoverable Amount under Ind AS 36:

Parameter	FVLCOD	VIU
Basis	Market participant view	Entity-specific view
Valuation Objective	Sale value	Value from continued use
Future Restructuring	May be included	Excluded unless committed
Future Enhancements	May be included	Excluded until incurred
Discount Rate	Market participant rate	Pre-tax asset-specific rate
Synergies	Limited to market participant synergies	Entity-specific synergies allowed
Primary Standard Reference	Ind AS 113 + Ind AS 36	Ind AS 36

In real-life impairment engagements:

• FVLCOD is commonly used when there are market transactions, comparable company data, or disposal possibilities.
• VIU is more commonly used for operating businesses, manufacturing plants, cash-generating units, and goodwill impairment testing because management forecasts are readily available.
• The recoverable amount is always the higher of FVLCOD and VIU, ensuring that an asset is not written down if either its sale value or its value from continued use supports the carrying amount

Comparison: Ind AS 36 vs IAS 36

Ind AS 36 is largely converged with IAS 36; however, some differences exist due to Indian accounting and regulatory requirements.

S. No.	Difference	Explanation
1	Investment Property	Paragraph 2(f) of IAS 36 has been omitted in Ind AS 36 because Ind AS 40 does not permit the fair value model in the same manner as IAS 40 and generally requires the cost model.
2	Transitional Provisions	IAS 36 contains its own transition requirements. Ind AS 36 excludes these because transition matters are covered comprehensively by Ind AS 101 (First-time Adoption of Indian Accounting Standards).
3	Terminology Changes	Ind AS uses Indian Companies Act terminology such as: “Balance Sheet” instead of “Statement of Financial Position” and “Statement of Profit and Loss” instead of “Statement of Comprehensive Income”. These are drafting changes and do not affect accounting treatment.
4	Impact of Ind AS 113	Certain paragraphs of IAS 36 (Para 25-27 and 5(b)) have been deleted because the guidance relating to fair value is now covered by Ind AS 113 (Fair Value Measurement).
5	Numbering Consistency	Paragraphs 91-95 remain numbered in Ind AS 36 even though they are deleted, to maintain consistency with IAS 36 numbering.
6	Illustrative Examples	Certain IAS 36 illustrative examples that do not form part of the standard have not been incorporated into Ind AS 36.

Practical Conclusion: Ind AS 36 vs IAS 36 : From an impairment testing perspective, recognition of impairment, recoverable amount determination, value in use method, goodwill testing, and CGU concepts are substantially identical between IAS 36 and Ind AS 36. Most differences are drafting, transitional, and fair-value-presentation related.

Comparison: Ind AS 36 vs AS 28

The differences between Ind AS 36 and the erstwhile Indian GAAP standard AS 28 are much more significant.

S. No.	Ind AS 36	AS 28
1	Applies to investments in subsidiaries, associates and joint ventures in separate financial statements.	Does not apply to these investments.
2	Specifically excludes biological assets, employee benefit assets, assets held for sale, etc.	No similar comprehensive exclusions.
3	Mandatory annual impairment testing for goodwill, indefinite-life intangibles, and intangibles not yet available for use.	Annual testing not mandatory unless indicators exist.
4	Goodwill impairment reversal is prohibited under all circumstances.	Reversal may be permitted in limited exceptional circumstances.
5	Goodwill allocated to CGUs benefiting from acquisition synergies.	Uses bottom-up and top-down approaches for goodwill allocation.
6	Uses “Fair Value Less Costs of Disposal”.	Uses “Net Selling Value”.
7	Extensive disclosure requirements including sensitivity analysis and goodwill disclosures	Comparatively limited disclosures.

Major Conceptual Differences: Ind AS 36 vs AS 28

1. Annual Goodwill Testing :

• Ind AS 36 : Goodwill must be tested every year irrespective of whether any impairment indicators exist.
• AS 28 : Testing was generally indicator-based and less stringent. Implication: Ind AS creates a more rigorous impairment regime.

2. Reversal of Goodwill Impairment: Ind AS 36: Once goodwill is impaired Impairment loss can never be reversed.

• AS 28: Reversal was permitted in rare exceptional situations where the original impairment arose from a one-off external event. Exam Point: This is one of the most frequently tested distinctions.

3. Recoverable Amount Terminology

• Ind AS 36: Recoverable Amount = Higher of Fair Value Less Costs of Disposal (FVLCOD) and Value in Use (VIU)
• AS 28 : Recoverable Amount = Higher of Net Selling Value and Value in Use. Fair Value under Ind AS is aligned with Ind AS 113 and market participant assumptions, making the framework more robust.

4. Disclosure Requirements

• Ind AS 36 requires detailed disclosures such as CGU-wise impairment, discount rate used, growth rates, key assumptions, goodwill allocation, and sensitivity analysis. AS 28 required much less granular disclosure.

Quick Revision

Particulars	IAS 36	Ind AS 36	AS 28
Annual Goodwill Test	Yes	Yes	No
Goodwill Reversal	No	No	Allowed in limited cases
FVLCOD Concept	Yes	Yes	No
Investments in Subsidiaries Covered	Yes	Yes	No
Extensive Disclosure	Yes	Yes	Limited
Based on CGU Concept	Yes	Yes	Limited application

Interview / Practical Takeaway

For professionals working under Ind AS, the most important operational changes from AS 28 are Mandatory annual impairment testing of goodwill, No reversal of goodwill impairment, Use of Fair Value Less Costs of Disposal instead of Net Selling Value, Greater reliance on valuation techniques (DCF, market approach, fair value hierarchy) and much more extensive disclosure and documentation requirements. These changes make Ind AS 36 substantially closer to global IFRS practices under IAS 36.

Practical Challenges in India – Valuation for Impairment Testing

Some common practical difficulties faced by companies include Determining reliable cash flow forecasts, Selection of suitable peer-based discount rates, Identifying appropriate CGUs, evaluating long-term growth assumptions, Performing sensitivity analysis and assessing impairment during economic uncertainty. Accordingly, impairment testing frequently requires collaboration between Finance teams, Valuation specialists, auditors, and Strategic management

Conclusion

Impairment testing under Ind AS 36 is far more than an accounting formality. It is an integrated valuation exercise combining finance, economics, forecasting, and strategic assessment. Robust impairment analysis helps organizations improve governance, enhance reporting credibility, align asset values with economic realities, and build investor trust.

As businesses continue to face rapid market changes, geopolitical uncertainties, and technological disruptions, effective impairment testing will remain one of the most critical aspects of financial reporting and valuation practice. For professional assistance in impairment valuation, CGU assessment, WACC determination, financial modeling, and Ind AS advisory, connect with Rajput Jain & Associates.