Impairment of Assets

Table of Contents:-

Impairment of Assets Under AS 28: Meaning, Testing and Accounting Treatment

Impairment of assets arises when the carrying amount of an asset exceeds the amount expected to be recovered from its use or sale.

Under Accounting Standard 28, Impairment of Assets, enterprises are required to assess at each reporting date whether there is any indication that an asset may be impaired. Where such indicators exist, the recoverable amount of the asset or relevant cash-generating unit may need to be determined.

Impairment testing is important because assets should not continue to be reported in financial statements at amounts higher than their recoverable value.

Businesses requiring assistance with audit, financial reporting and review of accounting treatments can explore our Audit & Assurance Services in India.

For professional accounting guidance, readers may also refer to the Institute of Chartered Accountants of India.

What is Impairment of Assets?

An asset is generally considered impaired when its carrying amount is higher than its recoverable amount.

Simple Formula

If Carrying Amount > Recoverable Amount → Impairment Exists

The difference may need to be recognised as an impairment loss in accordance with the applicable accounting framework.

Example

Suppose:

Carrying Amount of Asset: ₹1 crore
Recoverable Amount: ₹80 lakh

Potential impairment loss:

₹1 crore – ₹80 lakh = ₹20 lakh

The asset should not continue to be reflected at ₹1 crore if only ₹80 lakh is recoverable.

Why Impairment Testing is Important

Impairment testing helps ensure that:

assets are not overstated;
financial statements present a more appropriate carrying value;
losses in asset value are recognised when required;
management periodically evaluates economic performance of assets; and
users of financial statements receive more reliable information.

What is Carrying Amount?

The carrying amount is the amount at which an asset is recognised in the balance sheet after considering relevant accumulated adjustments.

General Concept

It may broadly represent:

Original Cost – Accumulated Depreciation/Amortisation – Accumulated Impairment Losses

The existing article also explains carrying amount as the amount at which the asset is shown in the balance sheet after depreciation or amortisation and impairment adjustments.

Example

Suppose machinery was purchased for ₹50 lakh.

Accumulated depreciation = ₹15 lakh
Previous impairment loss = ₹5 lakh

Carrying amount:

₹50 lakh – ₹15 lakh – ₹5 lakh = ₹30 lakh

This carrying amount is compared with the recoverable amount for impairment assessment.

What is Recoverable Amount?

Recoverable amount is central to impairment testing.

The existing page explains recoverable amount with reference to net selling price and value in use.

Net Selling Price / Fair Value Less Costs of Disposal

This represents the amount that may be realised from selling the asset after considering directly attributable disposal costs, subject to the applicable accounting framework.

Evidence may include:

binding sale agreements;
market quotations;
active market prices; or
reasonable valuation estimates.

Value in Use

Value in use is based on the present value of expected future cash flows from continuing use of the asset and its ultimate disposal.

It may involve:

future operating cash flows;
working-capital requirements;
capital expenditure;
residual value;
terminal value; and
appropriate discount rate.

Which Amount is Used?

Broadly, the recoverable amount is determined using the higher of the relevant recoverable values under the applicable standard.

This is because the asset should not be considered impaired if it can be recovered adequately through either continued use or disposal.

When Should an Asset Be Tested for Impairment?

Management should evaluate whether internal or external indicators suggest that asset value may have declined.

External Indicators

External factors may include:

significant decline in market value;
adverse technological developments;
changes in economic conditions;
changes in laws or regulations;
adverse market developments; and
significant changes in interest or discount rates.

The existing page specifically identifies significant market-value decline, adverse technological or economic changes and increases in market interest rates as external indicators.

Internal Indicators

Internal indicators may include:

physical damage;
obsolescence;
declining operating performance;
asset under-utilisation;
plans for disposal;
restructuring;
business closure; or
adverse internal forecasts.

The existing content similarly identifies obsolescence, physical damage and assets held for disposal or restructuring as internal indicators.

Market Capitalisation Indicator

Where the carrying amount of net assets is significantly higher than the market value of the enterprise, this may also indicate potential impairment and require further analysis.

What is a Cash-Generating Unit?

In many situations, an individual asset does not generate cash flows independently.

It may therefore be necessary to test the asset as part of a cash-generating unit, commonly referred to as a CGU.

Meaning of CGU

A CGU is generally the smallest identifiable group of assets that generates cash inflows substantially independent from other assets or groups of assets.

Example

A manufacturing machine may not generate revenue independently.

It may operate as part of an entire production line.

In such a case, impairment may need to be assessed at the level of the production unit or CGU rather than at the individual machine level.

Why CGU Identification Matters

Incorrectly identifying a CGU can distort impairment calculations.

A CGU that is too broad may allow profitable operations to offset losses in weak assets.

A CGU that is too narrow may not reflect how cash flows are actually generated.

Impairment Testing Process

The existing article sets out six major steps involving CGU life, working capital, capital expenditure, taxes, discount rate and terminal value.

A practical process may be structured as follows.

Step 1 – Identify the Asset or CGU

Determine whether impairment testing should be carried out for:

an individual asset; or
a cash-generating unit.

The selection should reflect how independent cash inflows are generated.

Step 2 – Determine the Projection Period

Management should determine the appropriate period for forecasting future cash flows.

The projection period should be supported by:

business plans;
budgets;
historical performance;
economic conditions; and
expected asset life.

Step 3 – Forecast Operating Cash Flows

Cash-flow forecasts should be based on reasonable and supportable assumptions.

Important variables may include:

revenue;
gross margins;
operating costs;
production levels;
capacity utilisation;
working capital;
capital expenditure; and
taxes.

Step 4 – Consider Working Capital

Working-capital changes can materially affect free cash flows.

Relevant components may include:

receivables;
inventory;
payables; and
other operating balances.

The original article also recognises the impact of working-capital movements on projected free cash flows.

Step 5 – Consider Capital Expenditure

Projected capital expenditure should be evaluated carefully.

Capital expenditure may be necessary to:

maintain production capacity;
replace equipment;
comply with regulations; or
support expected growth.

The timing and amount of capital expenditure can materially affect projected value.

Step 6 – Consider Taxes

Tax effects may need to be considered in a manner consistent with the chosen valuation approach and applicable accounting framework.

The assumptions used in determining cash flows and discount rates should remain internally consistent.

Step 7 – Select Appropriate Discount Rate

Future cash flows generally need to be discounted to present value.

The discount rate should reflect appropriate market-based considerations.

The existing page also stresses the importance of properly researching the appropriate discount rate used in impairment testing.

Step 8 – Determine Terminal Value

Where a business or CGU is expected to continue beyond the explicit forecast period, terminal value may be relevant.

It may be estimated using appropriate valuation methods.

Step 9 – Calculate Recoverable Amount

After estimating future cash flows and other relevant factors, determine the recoverable amount under the applicable standard.

Step 10 – Compare With Carrying Amount

Compare:

Carrying Amount vs Recoverable Amount

If carrying amount exceeds recoverable amount, impairment may need to be recognised.

Step 11 – Record Impairment Loss

The impairment loss should be recorded in accordance with the applicable accounting standard.

Step 12 – Make Appropriate Disclosures

Relevant disclosures should explain material impairment losses and assumptions where required.

Example of Impairment Testing

Suppose a manufacturing CGU has the following:

Carrying amount: ₹10 crore

Estimated recoverable amount: ₹8.50 crore

Therefore:

Impairment Loss = ₹10 crore – ₹8.50 crore = ₹1.50 crore

The carrying amount would need to be adjusted in accordance with applicable accounting requirements.

Before Impairment

Asset / CGU carrying value = ₹10 crore

After Impairment

Revised carrying value = ₹8.50 crore

Financial Statement Impact

The impairment loss generally affects:

carrying value of assets;
profit or loss;
net worth; and
relevant disclosures.

Impairment Indicators in Practical Business Situations

Understanding practical indicators can make impairment testing more effective.

Loss-Making Business Unit

If a particular division has consistently reported operating losses, its assets may require impairment evaluation.

Plant Operating Below Capacity

A plant designed for 100% capacity but operating at only 30% for several years may indicate reduced economic value.

Technological Obsolescence

New technology can reduce the commercial usefulness of existing equipment.

For example, machinery may remain physically operational but no longer be economically competitive.

Loss of Major Customer

If an asset or production line was primarily used for a major customer and that contract terminates, expected future cash flows may decline significantly.

Closure or Restructuring

Plans to close a location or discontinue a business segment may indicate impairment.

Significant Market Decline

A substantial reduction in market prices for relevant assets may require further impairment assessment.

Impairment of Goodwill

Goodwill can require special attention in impairment testing.

Why Goodwill Requires Careful Testing

Goodwill does not generally generate independent cash flows.

It is therefore typically associated with one or more CGUs for impairment assessment under the applicable framework.

Allocation to CGU

Management should appropriately identify the CGU or group of CGUs benefiting from the goodwill.

Comparison With Recoverable Amount

The carrying amount of the CGU, including allocated goodwill where applicable, is compared with its recoverable amount.

The existing page also refers to comparison of enterprise value with net operating assets of the CGU including goodwill.

Impairment vs Depreciation

Impairment and depreciation are different concepts.

Depreciation

Depreciation systematically allocates the depreciable amount of an asset over its useful life.

Impairment

Impairment recognises a reduction in recoverable value when circumstances indicate that the existing carrying amount may no longer be recoverable.

Key Difference

Depreciation = Planned allocation of cost

Impairment = Recognition of unexpected or additional decline in recoverable value

Both may affect the carrying amount of the asset.

Impairment vs Provision

A provision generally relates to a liability or obligation where timing or amount may be uncertain.

Impairment generally relates to reduction in the recoverable value of an asset.

Example of Provision

Provision for:

litigation;
warranty;
employee benefits; or
other obligations.

Example of Impairment

Reduction in recoverable amount of:

plant;
machinery;
goodwill;
business unit; or
other relevant assets.

Impairment Testing and Valuation

Impairment testing often requires valuation principles, particularly while determining future cash flows, discount rates and terminal values.

Cash Flow Forecasting

Projected cash flows should be based on reasonable assumptions and should be consistent with available budgets and business plans.

Discounted Cash Flow Method

Value in use calculations often rely on discounted cash-flow concepts.

Broadly:

Present Value = Future Cash Flows discounted at an appropriate rate

Terminal Value

Terminal value can represent a significant portion of the overall valuation.

Therefore, assumptions relating to:

long-term growth;
maintainable earnings;
cash flows;
multiples; and
discount rate

should be carefully evaluated.

For broader valuation support, businesses may refer to our Corporate Finance Advisory Services.

Impairment Testing and Audit

Impairment calculations can involve significant management estimates and assumptions.

Auditors may therefore examine whether the accounting treatment complies with the applicable financial reporting framework.

Areas Requiring Audit Attention

Audit attention may include:

identification of impairment indicators;
CGU determination;
budgets and forecasts;
growth assumptions;
operating margins;
discount rates;
terminal growth;
market evidence;
valuation reports; and
disclosures.

Management Estimates

Since impairment testing is often forward-looking, the quality and reasonableness of management assumptions are critical.

Supporting Documentation

Management should retain appropriate documentation supporting:

cash-flow forecasts;
Board-approved budgets;
valuation assumptions;
external market data;
discount rates;
impairment indicators; and
conclusions.

For audit-related assistance, visit our Statutory Audit Services in India.

Common Mistakes in Impairment Testing

Several errors can reduce the reliability of impairment calculations.

Ignoring Impairment Indicators

Management may continue carrying assets at historical values despite significant adverse business developments.

Unrealistic Growth Assumptions

Using overly optimistic revenue growth can artificially increase recoverable value.

Incorrect CGU Identification

Combining unrelated business units can distort the impairment result.

Inconsistent Assumptions

Growth, margins, capital expenditure, working capital and discount-rate assumptions should be internally consistent.

Ignoring Required Capital Expenditure

A CGU may require substantial investment to generate projected cash flows.

Ignoring such requirements can overstate value.

Inappropriate Discount Rate

A discount rate inconsistent with market risk can materially distort present value.

Excessively Optimistic Terminal Value

A small change in long-term growth assumptions can significantly affect valuation.

Inadequate Documentation

Even a technically reasonable impairment calculation may be difficult to support during audit if assumptions are not documented.

Impairment Testing for Foreign-Owned Companies in India

Indian subsidiaries of overseas groups may face additional considerations.

Group Valuation vs Local Accounting

The overseas parent may perform impairment testing under a global accounting framework, while the Indian entity may also need to assess treatment under the applicable Indian framework.

Differences may therefore arise in:

CGU identification;
discount rates;
accounting treatment;
reporting currency;
assumptions; and
disclosures.

Intercompany Dependencies

A local entity may depend heavily on:

overseas customers;
group intellectual property;
group funding;
transfer pricing arrangements; or
intercompany contracts.

Changes in such arrangements can affect projected cash flows and potentially trigger impairment indicators.

Foreign Currency Assumptions

Where revenues, purchases or financing involve foreign currency, projected cash flows should appropriately consider the relevant assumptions.

Communication With Group Auditors

Impairment calculations may also require coordination between local finance teams, overseas management and group auditors.

This is particularly important when impairment is material to consolidated financial statements.

Documentation Required for Impairment Testing

A well-documented impairment file may include:

Business Information

description of CGU;
organisational structure;
assets included;
historical financial results; and
significant business developments.

Forecast Information

revenue forecast;
margin assumptions;
operating costs;
working capital;
capital expenditure;
tax assumptions; and
terminal value.

Valuation Information

discount-rate computation;
comparable market information;
growth assumptions;
sensitivity analysis; and
external valuation reports, where applicable.

Accounting Documentation

carrying amount;
recoverable amount;
impairment calculation;
journal entry; and
disclosures.

Sensitivity Analysis in Impairment Testing

Sensitivity analysis is particularly important when recoverable amount is only slightly higher than carrying amount.

Discount Rate Sensitivity

Management may assess how recoverable amount changes if the discount rate increases.

Growth Rate Sensitivity

Lower long-term growth assumptions can materially reduce terminal value.

EBITDA Margin Sensitivity

Lower profitability assumptions can reduce projected cash flows.

Combined Scenario

A stronger analysis may evaluate the combined effect of:

lower sales growth;
lower margins; and
higher discount rates.

This helps management and auditors understand how much headroom exists before impairment arises.

How EzyBiz India Can Assist

EzyBiz India Consulting LLP assists businesses with audit, financial reporting and valuation-related matters.

Our Assistance Can Include

Depending upon the scope and applicable requirements, assistance may include:

identification of impairment indicators;
review of carrying amounts;
CGU analysis;
review of forecast cash flows;
working-capital assumptions;
capital-expenditure assumptions;
discount-rate review;
terminal-value analysis;
impairment calculations;
sensitivity analysis; and
review of disclosures.

For professional assistance, visit our Audit & Assurance Services in India.

Frequently Asked Questions

What is impairment of an asset?

An asset is generally impaired when its carrying amount exceeds its recoverable amount under the applicable accounting framework.

What is AS 28?

AS 28 is the Accounting Standard dealing with impairment of assets.

What is carrying amount?

Carrying amount is the amount at which an asset is reflected in the balance sheet after applicable depreciation, amortisation and impairment adjustments.

What is recoverable amount?

Recoverable amount is determined in accordance with the applicable accounting standard and generally involves comparison of values recoverable through use or disposal.

What is value in use?

Value in use is based on the present value of expected future cash flows from continuing use of an asset or CGU and its eventual disposal.

What is a CGU?

A cash-generating unit is generally the smallest identifiable group of assets generating cash inflows that are substantially independent from those of other assets or groups.

What are common impairment indicators?

Common indicators include market-value decline, physical damage, obsolescence, adverse economic or technological changes, poor operating performance and restructuring plans.

Is impairment the same as depreciation?

No. Depreciation systematically allocates the cost of an asset over its useful life, whereas impairment reflects an additional decline in recoverable value.

Why is sensitivity analysis important?

Sensitivity analysis shows how changes in key assumptions such as discount rate, growth or operating margins may affect the impairment conclusion.

Can impairment testing require valuation expertise?

Yes. Complex impairment calculations may require expertise in cash-flow forecasting, discount rates, terminal value and valuation methodologies.

Related Services & Guides

Prepared By:
Anil Agrawal, Chartered Accountant
EzyBiz India Consulting LLP, New Delhi

Last Updated: August 2026

Disclaimer: This article is intended for general informational purposes only. Accounting treatment for impairment depends upon the financial reporting framework applicable to the entity, facts and circumstances, asset or CGU involved and relevant professional guidance. Appropriate accounting, audit and valuation advice should be obtained before recognising or reversing any impairment.

Impairment of Assets