How to approach it
- Roll the carrying amount forward: cost, depreciation to the first impairment, the impairment, then revised depreciation on the reduced amount over the remaining life.
- Value in use: list only operating inflows and outflows for the remaining life, add the end-of-life disposal proceeds, and discount at the pre-tax rate.
- Fair value less costs of disposal: take the price and deduct only incremental disposal costs (fees, transfer taxes). Ignore reorganisation or under-utilisation losses.
- Recoverable amount is the higher of the two; the loss is carrying amount minus recoverable amount (never negative).
Key rules to apply
- IAS 36: recoverable amount = higher of fair value less costs of disposal and value in use.
- Value-in-use cash flows exclude financing (loan repayments, interest) and income tax, and use a pre-tax discount rate.
- Cash flows cover the asset's remaining useful life in its current condition.
- After an impairment, future depreciation is based on the reduced carrying amount.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Continuing to depreciate on original cost after the first impairment.
- Putting loan repayments or interest into value in use, or using the post-tax rate (both flagged by the examiners).
- Projecting more years than the asset has left.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q3 without copying it.
Original practice question
Second impairment test
A machine cost Rs 900m on 1 January 2022: 6-year life, residual value Rs 60m, straight-line. At 31 December 2023 it was impaired by Rs 50m (life and residual unchanged).
At 31 December 2025 it is tested again. Remaining life 2 years. Net operating cash flows: 2026 inflows Rs 200m, outflows Rs 90m; 2027 inflows Rs 190m, outflows Rs 99m; disposal proceeds at end-2027 Rs 60m. A loan instalment of Rs 150m falls due in 2027. Pre-tax rate 10%, post-tax 7%.
A buyer offers Rs 240m now; legal fees would be Rs 5m and transfer tax Rs 3m. Reorganising the line after a sale would cost Rs 12m.
Required: Calculate the impairment loss at 31 December 2025.
Worked solution
| Carrying amount | Rs m |
|---|---|
| Cost | 900.0 |
| Depreciation 2022–2023: (900 − 60) ÷ 6 × 2 | (280.0) |
| Impairment 2023 | (50.0) |
| Carrying amount 31 Dec 2023 | 570.0 |
| Depreciation 2024–2025: (570 − 60) ÷ 4 × 2 | (255.0) |
| Carrying amount 31 Dec 2025 | 315.0 |
| Value in use (10%) | Cash flow | Factor | PV |
|---|---|---|---|
| 2026: 200 − 90 | 110.0 | 0.9091 | 100.0 |
| 2027: 190 − 99 + 60 | 151.0 | 0.8264 | 124.8 |
| Value in use | 224.8 |
The loan instalment is financing and is excluded. Fair value less costs of disposal = 240 − 5 − 3 = Rs 232m (the Rs 12m reorganisation cost is not a cost of disposal).
Answer: Recoverable amount = Rs 232m (higher than VIU of Rs 224.8m). Impairment loss = 315 − 232 = Rs 83m.