Depreciation is scheduled cost release. Impairment is the unscheduled confession that an asset won't earn back its carrying value. An asset is worth the future benefits it'll generate, and when the evidence says those benefits have shrunk below book value, book value has to come down. Both frameworks test PP&E and finite-life intangibles only when there are indicators of impairment (demand collapse, technology shifts, regulatory hits, physical damage, market cap below book equity). Goodwill and indefinite-life intangibles get a test at least annually regardless.
Mechanics, timing and reversibility all differ between the two models, and by enough to change reported numbers by billions on identical facts.
How is an impairment loss measured?
IFRS / Ind AS (IAS 36 / Ind AS 36). There's one step. Impairment loss = carrying amount − recoverable amount, and recoverable amount is the higher of two figures:
- Fair value less costs of disposal (FVLCD), which is what a market participant would pay, minus selling costs.
- Value in use (VIU), the present value of the cash flows from continuing to use the asset. It runs on management's forecasts, capped at 5 years of detailed projections and then a steady growth rate no higher than the economy's. Those are discounted at a pre-tax rate and exclude future enhancements and unapproved restructurings.
Advertisement
Why "higher of"? Because a rational owner either keeps the asset (VIU) or sells it (FVLCD), whichever is worth more. Some assets produce no independent cash flows of their own, like one machine inside a plant. For those the test runs at the level of the cash-generating unit (CGU), the smallest asset group with independent cash inflows. If the impairment's cause abates, reversals are required, except for goodwill. They go only up to the carrying value the asset would have had if it had never been impaired, which you find by back-running depreciation on the pre-impairment value.
US GAAP (ASC 360, held-and-used assets). Two steps at the asset-group level:
- Recoverability screen. Compare the carrying amount with the undiscounted future cash flows from use and eventual disposal. If those undiscounted cash flows cover carrying value, there's no impairment. You stop there, even if fair value is far below book.
- Measurement. If the screen fails, impairment loss = carrying amount − fair value.
Held-and-used assets get no reversals, ever. Assets held for sale switch to the lower of carrying value and fair value less costs to sell, and they stop depreciating.
Worked example: same facts, two answers
Worked example: same facts, two answers. Take a machine with a carrying value of ₹100 crore and five years of remaining life, depreciated straight-line to nil. Use a pre-tax discount rate of 10%, which makes the 5-year annuity factor 3.791.
| Scenario | A: cash flows ₹21 cr/yr | B: cash flows ₹19 cr/yr |
|---|---|---|
| Undiscounted CF | 105 | 95 |
| US step 1 (vs 100) | 105 ≥ 100 → no impairment | 95 < 100 → fails, go to step 2 |
| Fair value less costs of disposal | 78 | 65 |
| Fair value, the US measurement basis (costs of disposal are nil here, so the two coincide) | 78 | 65 |
| US loss | 0 | 100 − 65 = 35 |
| Value in use (CF × 3.791) | 79.6 | 72.0 |
| Recoverable amount (higher of VIU, FVLCD) | 79.6 | 72.0 |
| IFRS/Ind AS loss | 100 − 79.6 = 20.4 | 100 − 72.0 = 28 |
Read the table twice. Everything that separates the two frameworks is in it.
- Scenario A. Economically, ₹100 crore of book value is worth about ₹80 crore in present-value terms. IFRS books a ₹20.4 crore loss. US GAAP books nothing, because the undiscounted screen ignores the time value of money. So US GAAP recognizes impairments later.
- Scenario B. Once the US screen fails, the write-down runs all the way to fair value, which is below IFRS's recoverable amount whenever VIU > FVLCD. US GAAP impairments arrive later but are often bigger. That's the "cliff". IFRS impairments arrive earlier and smaller, and they can later reverse. US ones are permanent.
Selling costs, and where the loss is reported
Watch the measurement base in the US column, because the two frameworks don't deduct the same things. ASC 360-10-35 measures a held-and-used asset down to fair value, full stop. Selling costs are excluded, on the reasoning that a company still using the machine isn't incurring them. Those costs come in only once the asset is reclassified as held for sale. At that point the carrying amount moves to fair value less costs to sell, and depreciation stops. IFRS deducts costs of disposal in both states, because FVLCD is one of the two legs of its recoverable amount. In the table above the costs of disposal happen to be nil, so the ₹65 crore serves both columns and the ₹35 crore loss reads the same either way. Give the same machine ₹5 crore of selling costs and the two separate. Under US GAAP the held-and-used loss stays ₹35 crore, while the held-for-sale loss becomes ₹40 crore.
On the P&L, impairments of operating assets go inside operating profit, usually as a separate line or, in India, under "exceptional items". They're added back as non-cash in indirect CFO. So CFO sails on serenely while the P&L bleeds, which is the statement-linkage loop again.
Real example: Tata Motors and Jaguar Land Rover
A real one to anchor it. In February 2019, Tata Motors took a ~£3.1bn (~₹27,800 crore) impairment of Jaguar Land Rover. It was then the largest quarterly loss in Indian corporate history, and it came after China demand cracked, diesel fell out of favor and Brexit loomed. Here's how it worked. JLR is tested as a single CGU under Ind AS 36. Its recoverable amount (value in use) fell below carrying value, and years of heavily capitalized development spend came back through one door. Two of this week's topics met in one line item. Capitalize aggressively in good times, and the impairment, when it comes, is the accumulated correction. File one more thing away. Cyclical companies under IFRS/Ind AS can reverse PP&E impairments when the cycle turns. European steelmakers, including Tata Steel's European business, have both impaired and partially reversed across cycles, so check any year's exceptional-items note. An Ind AS profit spike can be nothing more than an accounting echo.