AASB 136 Impairment of assets

AASB 136 valuation for impairment testing

AASB 136 ensures that assets are not carried at amounts greater than their recoverable value. In practice, entities must assess whether asset values remain supported by future economic benefits. When indicators of impairment arise, a valuation becomes necessary. As a result, AASB 136 valuation plays a critical role in financial reporting, particularly where judgement is required.

AASB 136 defines recoverable amount as the higher of:

• Fair value less costs of disposal. This measure reflects the price that could be achieved in a market transaction. Usually, it aligns with the framework under AASB 13. However, where market evidence is limited, valuation techniques must be applied.
• Value in use. Value in use is based on discounted future cash flows. This approach requires forecasting expected cash flows, applying an appropriate discount rate, and assessing risk and uncertainty. As a result, value in use introduces significant judgement.

AASB 136 valuation depends on several critical inputs. These inputs must be consistent and supportable. Common inputs include:

• future cash flow projections
• discount rates
• growth assumptions
• terminal values

Because each input interacts, inconsistencies can materially affect the outcome.

Important judgement areas

In practice, valuation challenges typically arise in the following areas:

• alignment of discount rates with cash flows
• consistency between budgets and assumptions
• treatment of growth beyond forecast periods
• identification of cash-generating units

Consequently, impairment testing often becomes a focus of audit scrutiny.

Audit considerations in AASB 136 valuation

AASB 136 valuation is closely linked to auditing standards. In particular:

• ASA 540 requires auditors to assess whether impairment estimates are reasonable and consistent with the financial reporting framework
• ASA 500 requires sufficient appropriate evidence to support assumptions
• ASA 620 requires evaluation of valuation experts where used

As a result, auditors focus on whether the valuation is supported, not simply calculated.

Relationship with valuation standards

Financial reporting standards do not prescribe detailed valuation methods. Instead, valuations are typically prepared using frameworks consistent with the International Valuation Standards (IVS).

IVS requires:

• a clearly defined scope
• appropriate valuation approaches
• transparent assumptions
• sufficient documentation

Therefore, AASB 136 valuation sits alongside IVS by combining reporting requirements, valuation methodology and evidentiary support.

When AASB 136 valuation is required

Entities must perform a valuation when indicators suggest that asset values may not be recoverable. Typical indicators include:

• declines in market value
• adverse economic conditions
• changes in business performance
• internal restructuring

When these indicators exist, entities must assess recoverable amount.

Common issues in impairment assessments

In most cases, issues arise from assumptions rather than calculations. Typical problems include:

• overly optimistic cash flow projections
• inappropriate discount rate selection
• lack of support for growth assumptions
• incomplete documentation

Therefore, impairment issues are usually driven by judgement and evidence rather than technique.

A practical perspective for accountants and auditors

From a practical perspective, impairment valuations succeed when key elements align. These include:

• realistic assumptions
• consistent methodology
• reliable input data
• clear documentation

If alignment is achieved, both reporting and audit outcomes improve.