IFRS Asset Impairment Testing: When It Is Required and How It Is Performed

In an environment of high market volatility, changing interest rates, technological transformation, and increasing investor expectations, asset impairment has become one of the most significant areas of IFRS financial reporting.

An asset impairment test helps determine whether the carrying amount of assets reported in the financial statements exceeds their recoverable amount. The results of the test are important not only for the preparation of IFRS financial statements but also for management decision-making, raising financing, and communicating with investors.

PKF Consulting Kazakhstan professionals have extensive experience in carrying out asset impairment testing projects in accordance with IFRS requirements. In this article, we discuss when an asset impairment test is required, the benefits it provides to businesses, and the key considerations that should be taken into account when performing it.

What Is an Asset Impairment Test under IAS 36?

An asset impairment test is a procedure prescribed by International Accounting Standard (IAS) 36, Impairment of Assets. Its primary purpose is to determine whether the carrying amount of an asset or a group of assets exceeds its recoverable amount.

If a company reports assets at a value higher than the amount that can be recovered through their use or sale, an impairment loss must be recognized.

In other words, an IFRS impairment test helps confirm that the financial statements present a fair and reliable view of the value of the business and its assets.

When Is an Asset Impairment Test Required?

Under IAS 36, goodwill and intangible assets with indefinite useful lives must be tested for impairment annually, regardless of whether any indicators of impairment exist.

For property, plant and equipment, as well as intangible assets with finite useful lives, impairment testing is required when indicators of impairment are present. Such indicators may include:

• deterioration in financial performance;
• adverse market conditions;
• increases in interest rates;
• changes in the competitive environment;
• loss of key customers;
• technological obsolescence of assets;
• changes in business strategy.

Particular attention is given to goodwill, which is tested at the level of cash-generating units (CGUs) or groups of CGUs to which it has been allocated as a result of a business combination.

Benefits of Conducting an Asset Impairment Test

An IFRS impairment test is not merely a compliance exercise required by IAS 36. It enables companies to reflect changes in the economic value of their business and assets in a timely manner. Unlike mechanical depreciation, impairment testing provides users of financial statements with more relevant information about a company’s actual financial position and future prospects.

Conducting an impairment test allows companies to:

• confirm the reasonableness of asset values reported in the financial statements;
• identify declines in the economic performance of specific assets or business segments in a timely manner;
• enhance the transparency of financial information for investors, lenders, and other stakeholders;
• gain additional confidence when preparing IFRS financial statements and undergoing audits;
• reduce the risk of significant financial statement adjustments in the future.

For investors and lenders, impairment testing results serve as an important indicator of investment performance and the quality of acquired assets. For management, the process helps identify underperforming business areas and supports timely strategic decision-making.

Key Considerations and Common Challenges in Asset Impairment Testing

Despite the apparent simplicity of the methodology, impairment testing projects are among the most complex valuation assignments performed under IFRS.

According to Tatyana Galyanina, an appraiser at PKF Consulting Kazakhstan with more than 20 years of experience, one of the main challenges in conducting an impairment test is the preparation of realistic financial forecasts and the justification of key assumptions.

“Many companies rely on internal budgets and business plans. However, for IAS 36 purposes, it is important to assess whether these forecasts are consistent with current market conditions. An impairment test is not an audit of a company’s business plan. Its purpose is to determine the recoverable amount of assets based on reasonable and supportable assumptions,” notes Tatyana Galyanina.

In practice, particular attention should be paid to:

• the realism of the company’s financial forecasts;
• whether projected growth rates are consistent with market conditions;
• the consideration of industry-specific and macroeconomic factors;
• the correct identification of assets or groups of assets generating cash flows;
• whether key assumptions are supported by internal and external sources of information.

According to Tatyana, additional challenges for Kazakhstani companies may include accounting for industry-specific factors, commodity price volatility, and other macroeconomic variables affecting business and asset values. For multinational groups, complexity often arises from multi-layered corporate structures, the need to analyze multiple jurisdictions, and the alignment of approaches with external auditors.

PKF Consulting Kazakhstan’s Experience in IFRS Valuation Engagements

PKF Consulting Kazakhstan regularly performs IFRS valuation engagements, including asset impairment testing in accordance with IAS 36.

Following an asset impairment testing engagement, KazakhOil Aktobe LLP, one of the largest oil-producing companies in the Aktobe region, recognized the high professional level of PKF Consulting Kazakhstan specialists and the quality of services provided.

In its recommendation letter, the company noted that the engagement delivered well-founded and reliable information necessary for making strategically important management decisions. It is also worth noting that the reports prepared by PKF Consulting Kazakhstan were successfully used during audit procedures and accepted by an independent auditor from one of the international audit firms, KPMG.

KazakhOil Aktobe LLP recommends PKF Consulting Kazakhstan as a reliable, competent, and professional partner in corporate finance and IFRS valuation.

Order an Asset Impairment Test and IFRS Valuation Services

If your company prepares IFRS financial statements, undergoes an audit, or plans to perform an asset valuation for financial reporting purposes, the specialists at PKF Consulting Kazakhstan are ready to assist.

Our expertise in business valuation, financial modeling, corporate finance, and IFRS requirements enables us to deliver results that serve as a reliable tool for financial reporting, communication with auditors, and strategic decision-making.

Contact us to discuss your project and receive professional advice on IFRS valuation and asset impairment testing.