An impairment test must be performed when there are indications that an asset may be worth less than its carrying amount on the balance sheet. Additionally, certain assets require annual impairment testing even when there are no indications of a loss in value. The specific requirements depend on whether the company applies International Financial Reporting Standards (IFRS) or the Spanish General Accounting Plan (PGC).

What Is an Impairment Test?

An impairment test is an assessment to determine whether the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the higher of its value in use and its fair value less costs of disposal.

If the carrying amount exceeds the recoverable amount, an impairment loss is recognised. When an asset cannot be assessed individually, the impairment test is performed at the level of the cash-generating unit (CGU) to which it belongs: the smallest identifiable group of assets that generates cash inflows largely independent of those from other assets or groups of assets.

When Is an Impairment Test Required Even Without Indications of Impairment?

Under IFRS, IAS 36 requires impairment testing at least annually, even in the absence of warning signs, for the following assets:

• Goodwill acquired in a business combination.
• Intangible assets with indefinite useful lives.
• Intangible assets that are not yet available for use.

Under the Spanish PGC, annual impairment testing is required for intangible assets that are not yet available for use. However, the current Spanish PGC does not require annual impairment testing of goodwill in the absence of impairment indicators.

When Is an Impairment Test Required if Indicators Arise?

For other non-financial assets subject to these requirements, companies must assess whether there are indications of impairment at each reporting date under IFRS, or at least at the end of the financial year under the Spanish PGC.

If no indications of impairment are identified, it is generally unnecessary to calculate the recoverable amount. However, if impairment indicators are detected, the company must determine the recoverable amount of the asset—or the cash-generating unit to which it belongs—and compare it with its carrying amount. If the carrying amount is higher, an impairment loss must be recognised.

External Indicators of Impairment

The most common external indicators include a significant decline in an asset’s market value, adverse changes in the economic, technological, legal, or competitive environment, and increases in interest rates that could significantly reduce its recoverable amount.

Internal Indicators of Impairment

Internal indicators may include obsolescence or physical damage, adverse changes in how an asset is used, the discontinuation of a project before it becomes operational, or internal management reports showing performance below expectations.

These examples are not exhaustive. Companies must assess the specific circumstances and, when an impairment indicator exists, determine whether an estimate of the recoverable amount is necessary.