Impairment of non-financial assets (equipment, goodwill, concession intangibles)

Cancelled projects, idle fleets and shrinking order books are classic impairment triggers that are easy to defer recognizing because management remains hopeful of a turnaround, but IAS 36 requires an impairment test as soon as an indicator exists, delaying the test overstates carrying values of equipment, goodwill and concession intangibles and defers a loss that stakeholders need to see promptly.

Has a major project been cancelled or suspended for a prolonged period, or has equipment become idle with no near-term redeployment plan, triggering an impairment indicator? Has the order book or backlog declined significantly in a way that reduces the future cash flow projections of the relevant cash-generating unit? Is there a goodwill balance or indefinite-life intangible from a prior acquisition that requires an annual impairment test regardless of indicators? Is the recoverable amount being determined as the higher of fair value less costs of disposal and value in use, using realistic (not overly optimistic) cash flow forecasts?

1. At each reporting date, assess whether internal or external indicators of impairment exist (project cancellation or prolonged suspension, idle equipment, declining order book and utilization rates, adverse changes in the regulatory or economic environment, carrying amount of net assets exceeding market capitalization).
2. Test annually regardless of indicators for goodwill and any indefinite-life intangibles.
3. Identify the appropriate cash-generating unit (CGU), often the smallest identifiable group of assets generating largely independent cash inflows, which for a fleet may be at a project, division or company level depending on how cash flows are monitored.
4. Estimate recoverable amount as the higher of fair value less costs of disposal and value in use.
5. Recognize an impairment loss for the excess of carrying amount over recoverable amount, allocating any CGU-level loss first to goodwill, then pro-rata to other assets in the CGU, subject to individual asset floors.
6. Reverse a previously recognized impairment loss (except for goodwill) if the recoverable amount subsequently increases, capped at the carrying amount that would have applied had no impairment been recognized.

Determine recoverable amount as the higher of fair value less costs of disposal (an orderly transaction between market participants, less incremental disposal costs) and value in use (the present value of future cash flows expected from continued use and ultimate disposal). For specialized heavy equipment with thin resale markets, value in use based on realistic, entity-specific future project pipeline and utilization assumptions is often more relevant than an observable fair value; use a pre-tax discount rate reflecting current market assessments of the time value of money and asset-specific risks not already reflected in the cash flow estimates.

Disclose: (1) impairment losses (and reversals) recognized in the period, by class of asset and by cash-generating unit, including where presented in profit or loss; (2) events and circumstances leading to the impairment or reversal; (3) whether recoverable amount was based on fair value less costs of disposal or value in use, and the key assumptions used (discount rate, growth rates, utilization assumptions); (4) for goodwill and indefinite-life intangibles, the carrying amount allocated to each CGU and a sensitivity analysis where a reasonably possible change in a key assumption would cause carrying amount to exceed recoverable amount.

• Waiting for year-end close to consider impairment even though a project cancellation or major suspension occurred mid-year (indicators require an as-of-the-event assessment, not just an annual one)
• using an overly optimistic redeployment assumption for idle equipment without a credible, specific future project pipeline to support the cash flow forecast
• testing at too aggregate a level (whole company) when cash flows are actually monitored and largely independent at a project or division level, masking a specific CGU'
• s impairment
• failing to test goodwill annually regardless of whether indicators exist
• reversing an impairment loss on goodwill, which IFRS prohibits.