What are the external and internal indicators that trigger an impairment test under IAS 36, and how should an analyst interpret management's assessment?

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IAS 36 requires entities to assess at each reporting date whether any **indication** exists that an asset may be impaired. If so, the entity must estimate the asset's recoverable amount. Here is the complete framework. **External Indicators** 1. **Significant decline in market value** — beyond what is expected from normal aging or use. Example: Ridgemont Mining's copper reserves drop 40% in market value due to a commodity price crash. 2. **Adverse changes in the technological, market, economic, or legal environment** — e.g., new regulation banning a chemical used in production. 3. **Increase in market interest rates** or discount rates that reduce value-in-use calculations materially. 4. **Carrying amount of net assets exceeds market capitalization** — a strong signal that assets may be overstated on the balance sheet. **Internal Indicators** 5. **Evidence of obsolescence or physical damage** — a factory fire, flood damage, or technology rendered obsolete by an internal R&D breakthrough. 6. **Adverse changes in the extent or manner of use** — asset idled, segment restructured, or operations discontinued. Example: Wexford Logistics parks 30% of its fleet due to lost contracts. 7. **Internal reporting shows economic performance is worse than expected** — operating cash flows or operating profit from the asset are significantly below forecast. 8. **Plans to dispose of the asset before the previously expected date.** \`\`\`mermaid flowchart TD A["Reporting Date"] --> B{"Any Impairment
Indicators?"} B -->|"External"| C["Market Value Drop
Regulatory Change
Rate Increase
MktCap < Book"] B -->|"Internal"| D["Obsolescence
Idle/Restructured
Poor Performance
Early Disposal Plan"] B -->|"No Indicators"| E["No Test Required
(except goodwill/indefinite)"] C --> F["Estimate Recoverable
Amount"] D --> F F --> G{"Recoverable < Carrying?"} G -->|"Yes"| H["Recognize
Impairment Loss"] G -->|"No"| I["No Write-Down"] \`\`\` **Analyst Interpretation Guidance:** - **Conservative management** may test proactively, resulting in timely write-downs but potentially smoothing earnings through big-bath charges during already-bad periods. - **Aggressive management** may argue indicators are temporary, delaying impairment recognition and overstating assets. - Watch for **goodwill-heavy balance sheets** where market cap has been below book value for multiple quarters — this almost always constitutes an indicator. - Compare **discount rates used in value-in-use** to peer companies. If management uses a notably lower rate, the recoverable amount may be inflated. **Key Exam Point:** For goodwill and indefinite-life intangibles, the annual test replaces the indicator-based trigger — but management must ALSO test whenever indicators arise between annual test dates. Our CFA Level II FRA course covers impairment testing with full numerical practice problems.

What are the external and internal indicators that trigger an impairment test under IAS 36, and how should an analyst interpret management's assessment?

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