Impairment Testing under Ind AS 36 India 2026: CGU, Value in Use, WACC & Checklist

Impairment testing under Ind AS 36 is not simply an accounting year-end exercise. For CFOs, finance teams, boards and transaction professionals, it is a valuation discipline that asks a direct question: is an asset or cash-generating unit carried at more than its recoverable amount? Under Ind AS 36, recoverable amount is the higher of fair value less costs of disposal and value in use. Where carrying amount exceeds recoverable amount, an impairment loss is recognised. This guide explains the valuation mechanics, cash-generating-unit logic, discount-rate discipline, common errors and a practical review checklist for Indian companies.

What Ind AS 36 requires

Ind AS 36 requires an entity to assess whether there is any indication that an asset may be impaired. The Standard defines recoverable amount as the higher of fair value less costs of disposal and value in use. It is not always necessary to calculate both measures: if one clearly exceeds the carrying amount, the asset is not impaired and the second measure may not need to be estimated. The Ministry of Corporate Affairs text also makes clear that recoverable amount is determined for an individual asset unless that asset does not generate cash inflows that are largely independent of other assets or groups of assets. In that situation, testing moves to the relevant cash-generating unit, or CGU.

ICAI’s Educational Material on Ind AS 36, issued on 28 February 2026, reinforces the judgement-heavy areas: identifying impairment indicators, determining CGUs and estimating recoverable amounts using reliable assumptions and projections. That is why a defensible impairment model must connect accounting conclusions to operational evidence, budgets, market data and valuation assumptions rather than rely on a mechanical spreadsheet.

Impairment testing under Ind AS 36: the valuation sequence

A robust process typically follows six steps. First, identify impairment indicators and the assets or CGUs that require testing. Second, reconcile the carrying amount of the tested unit, including assets and liabilities that belong in the comparison. Third, determine whether recoverable amount will be supported by value in use, fair value less costs of disposal, or both. Fourth, build and challenge the cash-flow forecast. Fifth, select a discount rate consistent with the risk and cash-flow basis. Sixth, compare recoverable amount with carrying amount, record any impairment and prepare the required disclosures and supporting audit trail.

CGU identification is often the first major judgement

A CGU is the smallest identifiable group of assets that generates cash inflows largely independent of other assets or groups of assets. The practical mistake is to choose a CGU only because it produces a convenient valuation result. The CGU should instead reflect how cash inflows are generated and how management monitors operations. Store networks, plants, business lines, brands and acquired businesses can all require different analysis depending on the facts.

Goodwill receives special attention. Ind AS 36 requires goodwill acquired in a business combination to be allocated, from the acquisition date, to the CGUs or groups of CGUs expected to benefit from the combination synergies. The allocation should also align with the level at which goodwill is monitored for internal management purposes and cannot simply be pushed into an overly broad unit to dilute impairment risk.

Value in use: where valuation judgement becomes critical

Value in use is a present-value calculation based on future cash flows from continuing use of the asset or CGU and its ultimate disposal, subject to the Standard’s rules. The practical model may look similar to a DCF, but the objective and cash-flow construction must remain compliant with Ind AS 36. Finance teams should therefore document the bridge from approved budgets to the impairment model, the forecast period, long-term assumptions, margin trajectory, capital expenditure, working-capital needs and terminal assumptions.

The biggest risk is usually not the formula; it is optimistic assumptions. A model that assumes rapid revenue growth, margin expansion and a low discount rate can create a large valuation cushion even where actual performance has deteriorated. Historical forecast accuracy, customer concentration, order-book quality, pricing pressure, utilisation, regulatory risks and execution capacity should therefore be reviewed before management signs off on the cash flows.

Discount rate and WACC: consistency matters

The discount rate should reflect the time value of money and risks specific to the asset or CGU to the extent those risks have not already been reflected in the cash flows. In practice, valuation teams often begin with market-based evidence such as a WACC framework and then assess whether adjustments are appropriate. The essential control is consistency: do not double-count the same risk in both the forecast and discount rate, and do not apply a corporate group rate automatically to a CGU with materially different business or country risk.

Worked impairment example

Assume a manufacturing CGU has a carrying amount of ₹120 crore. Management prepares a supportable value-in-use model that results in ₹104 crore. A separate fair-value-less-costs-of-disposal analysis, based on observable market evidence and appropriate selling-cost assumptions, indicates ₹108 crore. Recoverable amount is therefore ₹108 crore because Ind AS 36 uses the higher of the two measures. The indicative impairment is ₹12 crore: carrying amount of ₹120 crore less recoverable amount of ₹108 crore.

The arithmetic is simple, but the diligence should focus on the inputs. If the value-in-use model assumed 12% annual revenue growth despite recent stagnation, or the fair-value analysis used listed-company multiples without correcting for size, control, liquidity or business differences, the ₹108 crore conclusion may not be sufficiently robust. This is where valuation review adds more value than merely recomputing the spreadsheet.

Fair value less costs of disposal: do not treat it as a fallback number

Fair value less costs of disposal asks what could be obtained from an orderly disposal after relevant disposal costs. Depending on the asset or business, evidence may include quoted prices, recent transactions, market multiples or other valuation techniques consistent with fair-value measurement. Market evidence should be contemporaneous and comparable. Using a peer multiple without reconciling profitability, growth, capital intensity, geography and net debt can create a misleading result.

Common impairment-testing mistakes

Common failures include defining CGUs too broadly; using budgets that are inconsistent with board-approved operating plans; carrying forward stale forecasts; mixing nominal cash flows with a real discount rate or vice versa; using a group-wide WACC without analysing CGU risk; double-counting risk in cash flows and discount rate; failing to reconcile model EBITDA to audited or management accounts; overlooking working-capital and maintenance-capex needs; treating terminal growth as a balancing figure; and failing to preserve evidence supporting management judgements.

Goodwill, acquisition models and post-deal monitoring

Impairment testing becomes especially important after acquisitions. Purchase price allocation may recognise goodwill and identifiable intangible assets at completion, but subsequent performance can diverge from the investment case. Transaction teams should therefore retain the acquisition model, synergy assumptions, integration milestones and post-deal KPI history. If a business underperforms the acquisition case, the impairment model should not ignore that evidence simply because management has a new optimistic forecast.

Sensitivity analysis: test the valuation cushion

A single-point recoverable amount can hide fragility. A practical review should test combinations such as lower revenue growth, weaker margins, higher discount rate and lower terminal growth. If a small movement in assumptions eliminates headroom, that fact deserves governance attention even if no impairment is recorded in the base case. Sensitivity also helps the audit committee understand which assumptions actually drive the conclusion.

CFO and finance-team checklist

Before finalising an impairment test, confirm: impairment indicators have been documented; CGUs are consistent with independent cash inflows and internal monitoring; carrying amounts reconcile to the ledger; goodwill allocation is current; forecasts reconcile to approved budgets; historical forecast accuracy has been challenged; working capital and maintenance capex are realistic; discount-rate inputs are supportable; market multiples or transaction evidence are genuinely comparable; terminal assumptions are defensible; sensitivity analysis identifies the key break points; and the final memo clearly separates facts, accounting requirements and management judgement.

How impairment testing connects with transaction advisory

Impairment analysis is useful beyond statutory reporting. It can reveal deterioration in acquisition performance, weak cash conversion, overstated synergy expectations, capital-allocation mistakes and valuation assumptions that may also matter in fundraising, lender review, M&A or IPO readiness. A transaction-quality model therefore benefits from the same disciplines: clean historical data, normalized earnings, reliable forecasts, explicit risk assumptions and a transparent bridge from enterprise value to the accounting conclusion.

Related PGT guidance: WACC in DCF Valuation India | Purchase Price Allocation under Ind AS 103 | Business Valuation Methods in India

FAQs

What is recoverable amount under Ind AS 36?

Recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use. An impairment arises when carrying amount exceeds recoverable amount.

Does every impairment test require both value in use and fair value less costs of disposal?

No. Ind AS 36 states that it is not always necessary to determine both. If one measure exceeds carrying amount, the asset is not impaired and estimating the other measure may not be necessary.

Can WACC be used directly as the impairment discount rate?

A market-based WACC can be an important starting point, but the final rate must be consistent with the Ind AS 36 cash-flow basis and risk profile of the tested asset or CGU. A group-wide WACC should not be copied without analysis.

Why is goodwill impairment testing high risk?

Goodwill does not generate independent cash flows and must be allocated to the CGUs or groups of CGUs expected to benefit from the business combination. Poor CGU allocation or over-optimistic forecasts can materially distort the result.

Practical takeaway

Impairment testing under Ind AS 36 should be treated as a documented valuation exercise, not a year-end compliance formality. The strongest files connect accounting rules, operating performance, board-approved forecasts, market evidence, discount-rate logic and sensitivity analysis into one auditable conclusion. PGT & Associates can support finance and transaction teams with valuation modelling, impairment-model review, forecast challenge, acquisition-accounting analysis and related financial due diligence. Engagement scope depends on the facts and applicable professional requirements; no valuation or accounting outcome is guaranteed.

Sources

Primary sources reviewed for this guide include the Ministry of Corporate Affairs notified Ind AS 36, Impairment of Assets, and ICAI’s Educational Material on Ind AS 36 released on 28 February 2026. Readers should verify the latest notified amendments and facts applicable to their reporting period before relying on any conclusion.