1. The Core Principle of Impairment
IAS 36 (Impairment of Assets) ensures that an entity’s assets are carried at no more than their recoverable amount. If an asset’s carrying amount (book value) exceeds the amount that can be recovered through using or selling the asset, it is considered impaired, and the entity must recognize an impairment loss.
 
2. Determining Recoverable Amount
The Recoverable Amount of an asset or a Cash-Generating Unit (CGU) is defined explicitly as the higher of two metrics:
Recoverable Amount = max(FVLCD, VIU)
  • Fair Value Less Costs of Disposal (FVLCD): The price that would be received to sell an asset in an orderly transaction between market participants, minus direct incremental disposal costs.
  • Value in Use (VIU): The present value of the future cash flows expected to be derived from the asset or cash-generating unit through its continued operation and ultimate disposal.

3. Cash-Generating Units (CGUs) and Goodwill Impairment
If it is impossible to estimate the recoverable amount for an individual asset, the entity determines the recoverable amount for the asset’s Cash-Generating Unit (CGU). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets.
Allocation Sequence of an Impairment Loss in a CGU
When a CGU is impaired, the loss is allocated to reduce the carrying amount of the assets of the unit in the following strict chronological order:
  1. First, to reduce the carrying amount of any goodwill allocated to the CGU.
  2. Then, to the other assets of the CGU pro-rata based on the carrying amount of each asset in the unit.
  3. Constraint: No individual asset’s book value can be reduced below the highest of its own FVLCD, its own VIU, or zero.

 
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