Businesses invest in assets to produce income, support operations, and deliver long-term value. But over time, some assets lose their ability to produce the benefits they once did. When this happens, their value in the books may no longer reflect their real economic worth. Accounting Standard (AS) 28: Impairment of Assets provides clear rules to help companies deal with this issue.
AS 28 ensures that a business does not show an asset at a value that it cannot recover. This protects investors, lenders, managers, and other stakeholders from misleading financial information. It also guides students and accounting professionals in understanding how to assess and record impairment.
1. What is AS 28?
AS 28 is an accounting standard issued by ICAI. It deals with the impairment of assets, which means a loss in the value of an asset.
The main goal of AS 28 is simple: “A company should not carry an asset at more than the amount it can recover from using it or selling it.”
If an asset’s carrying amount (the value shown in the balance sheet) is higher than its recoverable amount (the amount the company can recover), the asset is impaired. When this happens, the company must record an impairment loss.
2. Why AS 28 Matters to Stakeholders?
- It keeps financial statements reliable.
- It prevents overstating asset values.
- It helps companies spot losses early.
- It gives investors a clearer picture.
- It reduces surprises in future years.
3. Scope: What AS 28 Covers and What It Does Not
AS 28 applies to most assets shown in financial statements. It includes both assets carried at cost and those carried at revalued amounts.
AS 28 covers:
- Tangible assets like buildings, machinery, vehicles, and equipment
- Intangible assets like patents, software, trademarks, and licenses
- Revalued assets covered under other standards
AS 28 does not apply to:
- Inventories
- Construction contract assets
- Financial assets such as shares or bonds
- Deferred tax assets
- Assets held for sale under other specific rules
All other assets fall under AS 28.
4. Key Terms Explained
Accounting standards often use formal terms. Below are the main terms in AS 28 explained in plain language.
Carrying Amount
The value of the asset in the balance sheet after deducting depreciation and any past impairment losses.
Recoverable Amount
The amount a company can recover from an asset. It is the higher of:
- Net selling price – the amount from selling the asset minus selling costs.
- Value in use – the present value of future cash flows the asset will generate.
Impairment Loss
The amount by which the carrying amount exceeds the recoverable amount.
Cash-Generating Unit (CGU)
A group of assets that work together to produce cash flows. If a single asset cannot generate cash on its own, we test impairment at the CGU level.
5. When Should a Company Check for Impairment?
A company should check for impairment at every balance sheet date. This does not mean calculating recoverable amount every time. Instead, companies first look for indicators of impairment.
If an indicator exists, then a full impairment test is required.
External indicators include:
- A drop in the asset’s market value
- New laws or regulations that reduce the asset’s use
- Negative changes in the market, technology, or economy
- Increase in interest rates that reduce future value
- Company’s market value falling below its net assets
Internal indicators include:
- Evidence of physical damage
- Poor performance of the asset
- Plans to discontinue or restructure operations
- Reduction in expected economic benefits
- Changes in how the asset is used
If any of these are present, the company must estimate the recoverable amount.
6. How to Measure the Recoverable Amount
When there is an indication of impairment, the company must calculate the recoverable amount. This involves two approaches.
Net Selling Price
This is the expected sale price in a fair, arm’s-length transaction minus any costs involved in selling the asset.
Value in Use
This requires:
- Estimating future cash flows
- Choosing a discount rate
- Calculating present value
Value in use gives the economic value of the asset from future operations.
Choosing Between the Two
Recoverable amount = higher of net selling price and value in use.
If cash flows cannot be estimated for the asset alone, use the CGU level.
7. Recognising and Recording an Impairment Loss
When to recognise a loss
If the carrying amount exceeds the recoverable amount, the asset is impaired. The company must record an impairment loss.
How to record it
- For cost-based assets: record the impairment loss in the profit and loss statement.
- For revalued assets: first reduce any revaluation surplus, then record remaining loss in the profit and loss statement.
Impact on depreciation
After recording impairment, the company must revisit:
- Useful life
- Residual value
- Depreciation method
Future depreciation must reflect the new, lower carrying amount.
8. Impairment at the Cash-Generating Unit Level
Some assets cannot generate cash on their own. In such cases, impairment testing shifts to the CGU.
Steps when a CGU is impaired:
- Determine the CGU’s carrying amount.
- Estimate the CGU’s recoverable amount.
- Compare the two.
- If impaired, allocate the loss:
- First to goodwill
- Then to other assets in the CGU on a pro-rated basis
Key rule
After allocation, no asset’s carrying amount should fall below:
- Net selling price (if determinable), or
- Value in use of the asset (if determinable), or
- Zero
9. Reversing an Impairment Loss
When reversal is allowed
At each year-end, companies check for signs that an impairment loss recorded earlier may no longer exist. If recoverable amount has increased due to changes in conditions, reversal may be permitted.
Rules for reversal
- Only reverse if the reasons for the earlier impairment have changed.
- Do not reverse impairment on goodwill unless the loss was caused by a rare external event that has now reversed.
- Reverse only up to the amount the asset would have had if impairment had never been recorded.
How to record the reversal
- For most assets: record gain in the profit and loss statement.
- For revalued assets: adjust the revaluation reserve first (if applicable).
10. What Companies Must Disclose
AS 28 requires clear disclosures so that users of financial statements understand the impact of impairment. Companies must disclose:
- Impairment losses recognised during the year
- Impairment losses reversed during the year
- Line items in the financial statements where these appear
- The nature of the asset or CGU impaired
- Events and assumptions that led to impairment
- Methods used to estimate recoverable amount
- For CGUs: description and carrying amount of each unit
Good disclosure improves trust and transparency.
11. Practical Challenges When Applying AS 28
Even though the standard is clear, companies face real-world difficulties. Here are the most common challenges explained in simple terms.
Forecasting Cash Flows
Estimating future income and costs is hard. Assumptions can be wrong. Businesses must use realistic forecasts, not optimistic ones.
Choosing the Discount Rate
Discount rate affects value in use. Too high a rate lowers recoverable amount; too low raises it. Companies must use a market-based rate, supported by evidence.
Identifying the Right CGU
Complex businesses find it difficult to identify the smallest group of assets that generates independent cash flows. Wrong CGU selection may distort impairment results.
Timing Impairment Tests
Companies often struggle to perform tests before deadlines. Delays lead to poor documentation and audit issues.
Reversal Judgments
It is easy to overstate reversals if companies do not apply strict criteria. Evidence must support a reversal.
12. Practical Example: How AS 28 Works in Real Life
Let’s look at a simple example.
Scenario
A company owns a machine with a carrying amount of ₹10 lakh. New technology enters the market, and the company sees signs that the machine may not produce the expected profits.
Step 1: Check for indicators
- New, more efficient machines entered the market
- Company plans to reduce use of the machine
Indicators exist → proceed with impairment test.
Step 2: Calculate recoverable amount
- Net selling price: ₹6.5 lakh
- Value in use: ₹7 lakh
So the recoverable amount is ₹7 lakh.
Step 3: Compare
Carrying amount (₹10 lakh) > Recoverable amount (₹7 lakh)
→ Impairment loss = ₹3 lakh
Step 4: Record the loss
The company records ₹3 lakh in the profit and loss statement. The new carrying amount becomes ₹7 lakh.
Step 5: Adjust future depreciation
Depreciation is recalculated based on ₹7 lakh and the revised useful life.
13. Checklist for Applying AS 28
Here is a simple checklist to help follow the standard:
- Review indicators at every year-end.
- If indicators exist, estimate recoverable amount.
- Compare carrying amount and recoverable amount.
- Record impairment loss if needed.
- For CGUs, allocate loss correctly.
- Adjust depreciation and useful life.
- Check for reversal in later periods.
- Make clear, complete disclosures.
- Keep documentation for audits.
- Review assumptions each year.
14. Frequently Asked Questions (FAQ)
Q1. What triggers an impairment test?
Any internal or external sign that an asset may have lost value.
Q2. What if no indicator exists?
No impairment test is required unless the asset is an intangible with an indefinite life (in that case, test annually).
Q3. Can impairment loss be reversed?
Yes, except for goodwill (with limited exception). Reversal must be based on clear evidence.
Q4. Does impairment affect depreciation?
Yes. After impairment, the company must recalculate depreciation based on the new carrying amount.
Q5. What is value in use?
The present value of expected future cash flows generated by the asset.
15. Summary and Key Takeaways
- AS 28 prevents overstating asset values.
- Impairment occurs when carrying amount is higher than recoverable amount.
- Companies must check for impairment indicators each year.
- Recoverable amount is the higher of net selling price and value in use.
- Losses must be recorded promptly and clearly.
- Reversals are allowed only under strict rules.
- Good documentation is essential.
- Clear disclosures help users understand the financial impact.
For detailed/official copy:
AS 28 of ICAI (As on 01/04/2025): Impairment of Assets
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