Table of Contents

8.12 Impairment of Assets

An asset is said to be impaired when its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the entity is required to recognise an impairment loss. Guidance on Impairment of Assets this is provided in AASB 1361 Impairment of Assets. To facilitate the application of AASB 136, IPWEA has included a Decision Tree for the implementation of AASB 13 which takes practitioners through the process required (IPWEA 2015b).

An impairment loss is recognised as an expense in the statement of comprehensive income and arises primarily from infrastructure being affected by physical damage, e.g. fire or flood, where the asset’s recoverable amount is less than its carrying value and an impairment loss then needs to be recorded. Impairment is therefore the decline in future economic benefits or service potential of the asset in addition to the consumption recorded through depreciation. It would have no impact on the residual value of the asset.

Terms used in impairment assessment are shown in Table 8.9.

Table 8.9: Terms used in impairment testing

TermDefinition
Carrying amount The amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon.
Impairment loss The amount by which the carrying amount of an asset or a cash-generating unit* exceeds its recoverable amount.
The recoverable amount of an asset or a cash-generating unit The higher of its fair value less cost to sell and its value in use.
Fair value less costs to sell The amount obtainable from the sale of an asset or cash-generating unit* in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal.
Value in use

The present value of the future cash flows expected to be derived from an asset or cash-generating unit.1

For not-for-profit entities, where the future economic benefits of an asset are not primarily dependent on the asset’s ability to generate net cash inflows and where the entity would, if deprived of the asset, replace its remaining future economic benefits, value in use is determined as the DRC of the asset.2

  1. AASB 136, para 6.
  2. AASB 136, para Aus 32.1.

* AASB 136 Impairment of Assets describes a cash generating unit as the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
Source: AASB (2015e).

An agency is to assess at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the entity is to estimate the recoverable amount of the asset.2

An agency is only required to make a formal estimate of the recoverable amount of an asset if an indicator of impairment is identified.3

For physical non-current assets, entities only have to test an asset for impairment if there are indicators of impairment. Such indicators could be of a general nature, for example, a prolonged period of drought, or more specific in nature such as fire in a complex.

Examples of indicators of impairment from external and internal sources of information are given in AASB 136 Impairment of Assets.

External sources of information

  • During the period, an asset’s market value has declined significantly more than would be expected as a result of the passage of time or normal use.
  • Significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated.
  • Market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially.
  • The carrying amount of the net assets of the entity is more than its market capitalisation.

Internal sources of information

  • Evidence is available of obsolescence or physical damage of an asset.
  • Significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite.
  • Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.4

Examples of impairment relating to service delivery by a road agency are shown in Table 8.10.

Table 8.10: Examples of impairment

Sources of informationExamples of impairment
Internal

Physical damage or obsolescence

Evidence is available of obsolescence or physical damage of an asset

A bridge is restricted in use after damage to structural members by a flood or overloaded vehicle.
An unsealed rural highway loses its gravel pavement when inundated by cross-flowing floodwaters.
A sealed highway loses its pavement strength when damaged by heavy vehicle traffic over the inundated pavement.

Source: Austroads (2009).

IPWEA (2015b) also provides a useful worked example of the estimation of asset impairment arising from flood damage to a bridge.


  1. AASB 136, Impairment of Assets, para 1, (AASB 2015e).

  2. AASB 136, para 9.

  3. AASB 136, para 8.

  4. AASB 136, Impairment of assets, para 12, 2015.