Ind AS 36 — Impairment of Assets, converged with IAS 36 — ensures that assets on a company's balance sheet are not carried at amounts exceeding their recoverable amounts. While conceptually straightforward, implementation involves significant management judgement — particularly in identifying Cash Generating Units (CGUs), estimating future cash flows, selecting discount rates, and allocating goodwill. The annual goodwill impairment test is one of the most scrutinised areas by auditors and analysts alike, especially after large acquisitions by Indian conglomerates.
Standard Reference: Ind AS 36, converged with IAS 36. Issued by MCA. No specific effective date amendment after initial convergence — applies since Ind AS adoption (Phase I: 1 April 2016; Phase II: 1 April 2017). Annual goodwill impairment test is mandatory — no longer allowed to carry goodwill at cost without testing.
Ind AS 36 applies to all assets except those covered by other standards. Key exclusions:
Assets covered: PP&E, intangible assets, goodwill, investment in associates/JVs (partially), right-of-use assets (Ind AS 116), exploration and evaluation assets.
At each reporting date, assess whether there is any indication that an asset may be impaired. If yes, estimate recoverable amount. For goodwill and indefinite-life intangibles: test annually regardless of indicators.
| External Indicators | Internal Indicators |
|---|---|
| Significant decline in market value more than expected with time/use | Evidence of obsolescence or physical damage |
| Significant adverse change in technology, market, economic environment | Plans to discontinue/restructure the operation |
| Increase in market interest rates or market rates of return affecting discount rate | Internal evidence that economic performance of asset is worse than expected |
| Carrying amount of net assets > market capitalisation | Cash flows/profits significantly below budget |
| Adverse legal/regulatory changes | Operating losses or net cash outflows from the asset |
Many assets cannot generate cash flows independently — they work as part of a larger group. A CGU is the smallest identifiable group of assets that generates cash inflows independently of other groups.
CGU identification requires judgement: a single machine in an integrated factory is not a CGU (it cannot generate cash independently). But a specific retail store, a manufacturing plant serving a specific customer segment, or a subsidiary business may each be a CGU.
Recoverable Amount = Higher of:
If either exceeds carrying amount → no impairment. If both are below carrying amount → impairment = Carrying Amount − Recoverable Amount.
VIU calculation involves:
Scenario: GroupCo acquired TelecomTarget Ltd in 2019 for ₹12,000 crore. Net assets of TelecomTarget at acquisition = ₹4,000 crore. Goodwill recognised = ₹8,000 crore. By March 2026, the telecom market is highly competitive; ARPU (Average Revenue Per User) has declined from ₹180 to ₹130; TelecomTarget faces a potential spectrum renewal cost. Management must test goodwill annually.
VIU Calculation as at 31 March 2026:
| Year | Projected FCF (₹Cr) | Discount Factor (WACC 14%) | PV of FCF (₹Cr) |
|---|---|---|---|
| FY2027 | 600 | 0.877 | 526 |
| FY2028 | 720 | 0.769 | 554 |
| FY2029 | 840 | 0.675 | 567 |
| FY2030 | 900 | 0.592 | 533 |
| FY2031 | 950 | 0.519 | 493 |
| Terminal Value (3% growth) = 950×1.03/(14%-3%) = 8,900 × 0.519 | — | 0.519 | 4,619 |
| Total VIU | 7,292 |
Impairment Calculation:
| Item | ₹ Crore |
|---|---|
| Carrying amount of CGU (net assets + goodwill) | 11,500 (₹3,500 net assets + ₹8,000 goodwill) |
| Recoverable Amount (VIU) | 7,292 |
| Impairment Loss | 4,208 |
| Allocated first to goodwill (₹8,000 > ₹4,208) | 4,208 (goodwill written down by this amount) |
| Residual goodwill after impairment | 3,792 |
Note: Once goodwill is impaired, the loss cannot be reversed in future periods, even if recoverable amount subsequently exceeds carrying amount.
Scenario: TowerCo owns 1,000 towers in a specific circle. Each tower is a separate CGU (revenue from tenancy agreements is independently identifiable per tower). Average tenancy ratio has fallen from 2.2 to 1.4 due to a major telecom operator's network rollback following financial distress.
Per-tower analysis (average):
| Parameter | Before (2.2 tenancies) | After (1.4 tenancies) |
|---|---|---|
| Monthly revenue per tower | ₹2,20,000 | ₹1,40,000 |
| Annual EBITDA per tower | ₹15,60,000 | ₹7,20,000 |
| Carrying amount per tower | ₹1,20,00,000 | ₹1,20,00,000 |
| VIU per tower (at 12% WACC, 15yr life) | ₹1,30,00,000 | ₹60,00,000 |
| Impairment per tower | — | ₹60,00,000 |
| Total impairment (1,000 towers) | — | ₹600 Cr |
Scenario: PharmaCo spent ₹350 Cr developing and capitalising an internally generated intangible asset (drug candidate at Phase 3 clinical stage). In FY2026, Phase 3 trials fail to achieve primary endpoints. FDA approval is now considered highly unlikely.
Analysis: The asset's recoverable amount = FVLCTS ≈ ₹30 Cr (salvage value of IP for out-licensing partial data). VIU ≈ ₹0 (no expected future cash flows). Recoverable Amount = ₹30 Cr. Impairment = ₹350 Cr − ₹30 Cr = ₹320 Cr.
This immediately results in a ₹320 Cr hit to the P&L. Analysts reviewing pharma companies watch for capitalised drug development costs relative to pipeline success rates as an indicator of potential future impairment.
When a CGU (or group of CGUs) is impaired, the impairment loss is allocated in this sequence:
Reversal of impairment:
| Disclosure | Required Content |
|---|---|
| Impairment loss/reversal by class | Amount, line item in P&L, segment affected |
| CGU impairment | Description of CGU, carrying amount of goodwill/intangibles allocated, recoverable amount basis (VIU or FVLCTS) |
| VIU assumptions | Period of cash flow projections, growth rate, discount rate, basis of key assumptions |
| Sensitivity | For material CGUs: if reasonable change in key assumptions would cause impairment |
| Goodwill | Carrying amount by CGU; aggregate amount not yet allocated to CGUs |
Goodwill impairment is irreversible because Ind AS 36 (and IAS 36) take a conservative approach: once goodwill is impaired, any subsequent improvement in the business could be due to internally generated goodwill — which cannot be recognised under Ind AS 38 (Intangible Assets). Allowing goodwill impairment reversal would effectively permit entities to recognise internally generated goodwill, which the standards prohibit. Therefore, once goodwill is written down, it stays written down. Only assets other than goodwill (PP&E, intangibles with finite life) can have impairment reversals when conditions improve.
The discount rate should be a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. In practice, this is typically derived from the entity's WACC (Weighted Average Cost of Capital) — calculated using the Capital Asset Pricing Model (CAPM) for equity cost and market rates for debt cost. The WACC is then converted to a pre-tax rate (by grossing up for the applicable tax rate). In India, WACC for impairment testing typically ranges from 12–18% depending on the sector and entity's risk profile. The rate must reflect the economic environment where the CGU operates — a foreign subsidiary's CGU would use local market rates.
When goodwill is recognised on an acquisition, Ind AS 36 requires it to be allocated to CGUs (or groups of CGUs) that are expected to benefit from the synergies of the combination — no later than the end of the reporting period after the acquisition. Allocated goodwill is tested as part of the CGU's annual impairment test. Unallocated goodwill (which may exist if allocation is not yet complete) must still be tested annually by comparing the recoverable amount of the group of CGUs it relates to against their combined carrying amounts. In practice, most companies try to allocate goodwill by the end of the purchase price allocation (PPA) period (12 months from acquisition under Ind AS 103).
Ind AS 36 — Impairment of Assets, converged with IAS 36 — ensures that assets on a company's balance sheet are not carried at amounts exceeding their recoverable amounts. While conceptually straightforward, implementation involves significant management judgement — particularly in identifying Cash Generating Units (CGUs), estimating future cash flows, selecting discount rates, and allocating goodwill. The annual goodwill impairment test is one of the most scrutinised areas by auditors and analysts alike, especially after large acquisitions by Indian conglomerates.
Standard Reference: Ind AS 36, converged with IAS 36. Issued by MCA. No specific effective date amendment after initial convergence — applies since Ind AS adoption (Phase I: 1 April 2016; Phase II: 1 April 2017). Annual goodwill impairment test is mandatory — no longer allowed to carry goodwill at cost without testing.
Ind AS 36 applies to all assets except those covered by other standards. Key exclusions:
Assets covered: PP&E, intangible assets, goodwill, investment in associates/JVs (partially), right-of-use assets (Ind AS 116), exploration and evaluation assets.
At each reporting date, assess whether there is any indication that an asset may be impaired. If yes, estimate recoverable amount. For goodwill and indefinite-life intangibles: test annually regardless of indicators.
| External Indicators | Internal Indicators |
|---|---|
| Significant decline in market value more than expected with time/use | Evidence of obsolescence or physical damage |
| Significant adverse change in technology, market, economic environment | Plans to discontinue/restructure the operation |
| Increase in market interest rates or market rates of return affecting discount rate | Internal evidence that economic performance of asset is worse than expected |
| Carrying amount of net assets > market capitalisation | Cash flows/profits significantly below budget |
| Adverse legal/regulatory changes | Operating losses or net cash outflows from the asset |
Many assets cannot generate cash flows independently — they work as part of a larger group. A CGU is the smallest identifiable group of assets that generates cash inflows independently of other groups.
CGU identification requires judgement: a single machine in an integrated factory is not a CGU (it cannot generate cash independently). But a specific retail store, a manufacturing plant serving a specific customer segment, or a subsidiary business may each be a CGU.
Recoverable Amount = Higher of:
If either exceeds carrying amount → no impairment. If both are below carrying amount → impairment = Carrying Amount − Recoverable Amount.
VIU calculation involves:
Scenario: GroupCo acquired TelecomTarget Ltd in 2019 for ₹12,000 crore. Net assets of TelecomTarget at acquisition = ₹4,000 crore. Goodwill recognised = ₹8,000 crore. By March 2026, the telecom market is highly competitive; ARPU (Average Revenue Per User) has declined from ₹180 to ₹130; TelecomTarget faces a potential spectrum renewal cost. Management must test goodwill annually.
VIU Calculation as at 31 March 2026:
| Year | Projected FCF (₹Cr) | Discount Factor (WACC 14%) | PV of FCF (₹Cr) |
|---|---|---|---|
| FY2027 | 600 | 0.877 | 526 |
| FY2028 | 720 | 0.769 | 554 |
| FY2029 | 840 | 0.675 | 567 |
| FY2030 | 900 | 0.592 | 533 |
| FY2031 | 950 | 0.519 | 493 |
| Terminal Value (3% growth) = 950×1.03/(14%-3%) = 8,900 × 0.519 | — | 0.519 | 4,619 |
| Total VIU | 7,292 |
Impairment Calculation:
| Item | ₹ Crore |
|---|---|
| Carrying amount of CGU (net assets + goodwill) | 11,500 (₹3,500 net assets + ₹8,000 goodwill) |
| Recoverable Amount (VIU) | 7,292 |
| Impairment Loss | 4,208 |
| Allocated first to goodwill (₹8,000 > ₹4,208) | 4,208 (goodwill written down by this amount) |
| Residual goodwill after impairment | 3,792 |
Note: Once goodwill is impaired, the loss cannot be reversed in future periods, even if recoverable amount subsequently exceeds carrying amount.
Scenario: TowerCo owns 1,000 towers in a specific circle. Each tower is a separate CGU (revenue from tenancy agreements is independently identifiable per tower). Average tenancy ratio has fallen from 2.2 to 1.4 due to a major telecom operator's network rollback following financial distress.
Per-tower analysis (average):
| Parameter | Before (2.2 tenancies) | After (1.4 tenancies) |
|---|---|---|
| Monthly revenue per tower | ₹2,20,000 | ₹1,40,000 |
| Annual EBITDA per tower | ₹15,60,000 | ₹7,20,000 |
| Carrying amount per tower | ₹1,20,00,000 | ₹1,20,00,000 |
| VIU per tower (at 12% WACC, 15yr life) | ₹1,30,00,000 | ₹60,00,000 |
| Impairment per tower | — | ₹60,00,000 |
| Total impairment (1,000 towers) | — | ₹600 Cr |
Scenario: PharmaCo spent ₹350 Cr developing and capitalising an internally generated intangible asset (drug candidate at Phase 3 clinical stage). In FY2026, Phase 3 trials fail to achieve primary endpoints. FDA approval is now considered highly unlikely.
Analysis: The asset's recoverable amount = FVLCTS ≈ ₹30 Cr (salvage value of IP for out-licensing partial data). VIU ≈ ₹0 (no expected future cash flows). Recoverable Amount = ₹30 Cr. Impairment = ₹350 Cr − ₹30 Cr = ₹320 Cr.
This immediately results in a ₹320 Cr hit to the P&L. Analysts reviewing pharma companies watch for capitalised drug development costs relative to pipeline success rates as an indicator of potential future impairment.
When a CGU (or group of CGUs) is impaired, the impairment loss is allocated in this sequence:
Reversal of impairment:
| Disclosure | Required Content |
|---|---|
| Impairment loss/reversal by class | Amount, line item in P&L, segment affected |
| CGU impairment | Description of CGU, carrying amount of goodwill/intangibles allocated, recoverable amount basis (VIU or FVLCTS) |
| VIU assumptions | Period of cash flow projections, growth rate, discount rate, basis of key assumptions |
| Sensitivity | For material CGUs: if reasonable change in key assumptions would cause impairment |
| Goodwill | Carrying amount by CGU; aggregate amount not yet allocated to CGUs |
Goodwill impairment is irreversible because Ind AS 36 (and IAS 36) take a conservative approach: once goodwill is impaired, any subsequent improvement in the business could be due to internally generated goodwill — which cannot be recognised under Ind AS 38 (Intangible Assets). Allowing goodwill impairment reversal would effectively permit entities to recognise internally generated goodwill, which the standards prohibit. Therefore, once goodwill is written down, it stays written down. Only assets other than goodwill (PP&E, intangibles with finite life) can have impairment reversals when conditions improve.
The discount rate should be a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. In practice, this is typically derived from the entity's WACC (Weighted Average Cost of Capital) — calculated using the Capital Asset Pricing Model (CAPM) for equity cost and market rates for debt cost. The WACC is then converted to a pre-tax rate (by grossing up for the applicable tax rate). In India, WACC for impairment testing typically ranges from 12–18% depending on the sector and entity's risk profile. The rate must reflect the economic environment where the CGU operates — a foreign subsidiary's CGU would use local market rates.
When goodwill is recognised on an acquisition, Ind AS 36 requires it to be allocated to CGUs (or groups of CGUs) that are expected to benefit from the synergies of the combination — no later than the end of the reporting period after the acquisition. Allocated goodwill is tested as part of the CGU's annual impairment test. Unallocated goodwill (which may exist if allocation is not yet complete) must still be tested annually by comparing the recoverable amount of the group of CGUs it relates to against their combined carrying amounts. In practice, most companies try to allocate goodwill by the end of the purchase price allocation (PPA) period (12 months from acquisition under Ind AS 103).