Impairment Testing Protocols

NFRA Guidance on Impairment of Non-Financial Assets On 30 September 2025, NFRA released its 4th publication in the Auditor–Audit Committee Interaction Series, spotlighting impairment of non-financial assets under Ind AS 36 and audit requirements under SA 540. This edition underscores the critical role of judgement, estimates, and governance oversight in ensuring transparency, audit quality, and investor confidence. Key Regulatory Framework - Companies Act 2013: Directors must ensure estimates and judgments are prudent.
- SEBI LODR: Audit Committees must review major accounting entries involving estimates.
- Ind AS 36: Assets must not exceed recoverable amount (higher of value in use and fair value less costs of disposal).
- SA 540: Auditors must rigorously test accounting estimates and management assumptions. Core Concepts - Impairment is a reduction in recoverable value, distinct from depreciation.
- Cash Generating Units (CGUs) are tested when assets cannot be assessed individually.
- Indicators of impairment: market declines, rising interest rates, adverse regulatory/market changes, asset underperformance. Audit & Governance Focus - Auditors: Validate models, test assumptions, perform sensitivity/scenario analysis, disclose as Key Audit Matters (KAMs).
- Audit Committees: Challenge management assumptions (growth rates, discount rates), ensure annual goodwill testing, and monitor disclosures. Disclosure Expectations - Amounts of impairment losses and reversals.
- Key assumptions and methods (discount rates, growth projections).
- Goodwill allocation rationale and sensitivity analysis outcomes. Checklist for Audit Committees Audit Committees should ask:
• How were impairment indicators identified?
• Were growth and discount rate assumptions reasonable?
• Was sensitivity/scenario analysis performed?
• How were goodwill and indefinite-life intangibles tested?
• Are disclosures transparent and specific, not boilerplate? Impairment testing is both a technical and governance responsibility. Management must provide realistic estimates, auditors must challenge them, and Audit Committees must oversee with diligence to protect investors and uphold financial reporting integrity.

𝐍𝐅𝐑𝐀 𝐀𝐮𝐝𝐢𝐭𝐨𝐫–𝐀𝐮𝐝𝐢𝐭 𝐂𝐨𝐦𝐦𝐢𝐭𝐭𝐞𝐞 𝐈𝐧𝐭𝐞𝐫𝐚𝐜𝐭𝐢𝐨𝐧 𝐒𝐞𝐫𝐢𝐞𝐬 4 𝐑𝐞𝐥𝐞𝐚𝐬𝐞𝐝 👇 The National Financial Reporting Authority (NFRA) has released its latest publication focusing on Impairment of Non-Financial Assets under Ind AS 36 and auditor responsibilities under SA 540 and related SAs. This initiative is part of NFRA’s efforts to strengthen Audit Committee–Auditor communication and enhance the quality of financial reporting and audit oversight. 🔑 Key Highlights from the Paper: Distinction between depreciation vs impairment – while depreciation is systematic allocation, impairment arises when carrying value > recoverable amount. Audit Committees’ role (as per Companies Act & SEBI LODR): oversight of significant estimates and judgments, particularly impairment testing. Ind AS 36 framework: Identification of Cash-Generating Units (CGUs). Recognition of impairment indicators (internal & external). Measuring recoverable amount – higher of fair value less cost of disposal vs. value in use. Annual impairment testing for goodwill & indefinite-life intangibles. Auditor’s responsibilities (SA 540, SA 260, SA 701, etc.): Assessing management assumptions, models, and use of experts. Sensitivity testing & scenario analysis. Challenging growth projections, discount rates, and terminal values. Ensuring disclosures are transparent and aligned with Ind AS & SEBI requirements. Potential Questions Audit Committees may ask auditors: How were impairment indicators identified? Were CGUs and goodwill allocations tested appropriately? How robust were the assumptions on future cash flows and discount rates? Is impairment of non-financial assets treated as a Key Audit Matter (KAM)? 📌 Why this matters: Impairment testing is highly judgmental and subject to management bias. Strengthening oversight and communication between auditors and Audit Committees ensures greater transparency, protects investor interests, and improves audit quality. 👉 This NFRA initiative is a timely reminder for Boards, Audit Committees, and Auditors to revisit their practices around critical accounting estimates. For more such updates follow Vivek Agarwal

FINANCIAL ACCOUNTING 19. Impairment Testing: Ensuring Accurate Asset Valuation Under GAAP/IFRS Impairment testing is a critical process in financial accounting, ensuring that assets are not overstated on the balance sheet. Under both GAAP and IFRS, companies are required to test their assets for impairment whenever there is an indication that an asset’s carrying value may exceed its recoverable amount. The goal is to ensure that financial statements reflect the true value of a company’s assets, providing stakeholders with accurate information to make informed decisions. Asset Recoverability: The Key to Impairment Testing Impairment occurs when the recoverable amount of an asset is less than its carrying value. This is particularly important for long-term assets like property, plant, equipment, and intangible assets. Under GAAP, impairment testing is usually done in two steps: 1. Step 1: Compare the carrying amount of the asset to the sum of the undiscounted future cash flows expected from the asset. If the carrying amount exceeds the cash flows, impairment is indicated. 2. Step 2: If impairment is indicated, the asset is written down to its fair value, which is typically determined by discounted future cash flows or market prices. Under IFRS, the approach is somewhat similar, but there are differences in how recoverable amounts are calculated. IFRS uses the higher of an asset’s fair value less costs to sell or value in use (i.e., the present value of future cash flows). The key point here is that the recoverable amount must be reviewed at each reporting period, even if no impairment indicators are present. When to Test for Impairment Impairment testing isn’t only a periodic process; it’s also triggered by specific events or changes in circumstances that may suggest an asset’s carrying value is no longer recoverable. These include: Significant declines in market value. Obsolescence or physical damage to the asset. Adverse changes in the business environment, such as regulatory changes or new competition. For goodwill and other intangible assets with indefinite useful lives, impairment testing must be done at least annually, regardless of whether there’s an indication of impairment. Impairment Losses and Reversals When impairment is recognized, it’s important to understand that losses are recorded in the profit and loss statement. However, for certain assets like intangible assets under IFRS, if there’s a reversal of impairment in subsequent periods (when the recoverable amount increases), it may be recognized in the financial statements. Under GAAP, the reversal of impairment losses is generally not allowed.

💡 Practical Real-Life Ind AS Series – Ind AS 36 (Impairment of Assets) 💡 One of the most critical aspects of financial reporting is ensuring that the assets on the balance sheet are not overstated. That’s exactly what Ind AS 36 – Impairment of Assets addresses. 📌 In simple terms: If the carrying amount of an asset is more than its recoverable amount, the asset is impaired – and companies must recognize a loss. 🔍 In my latest breakdown, I’ve covered: ✅ Real-life corporate examples of impairment testing (from Indian companies) ✅ Step-by-step calculation of recoverable amount ✅ Journal entries for impairment & reversal ✅ Practical challenges companies face during impairment reviews ✨ This standard is especially relevant in industries with heavy investments (like airlines, telecom, oil & gas) where asset values fluctuate significantly. 📖 Check out this detailed analysis of Ind AS 36 where I’ve explained the concepts with real financials, journal entries, and case studies! 👉 Follow my page for more practical insights & real-life learnings on Ind AS, IFRS, and Corporate Finance. #IndAS36 #Impairment #AccountingStandards #FinancialReporting #CorporateFinance #AccountingStudents #CAFinal #IFRS #Auditing #FinanceProfessionals #Valuation #CA #CMA #RealLifeAccounting #PracticalLearning