Ind AS 36 Impairment Testing in India: What CFOs, Auditors, and Boards Must Get Right

Valuation Under Impairment Testing

A Practitioner’s Guide to Ind AS 36 — What CFOs, Auditors, and Boards Need to Get Right

Fintrac Advisory  |  Valuation & Financial Reporting  |  FY 2025-26

When Tata Steel acquired Corus in 2007 for approximately USD 12 billion, the goodwill recorded on the balance sheet was substantial. Within a few years, as European steel markets deteriorated, the question every auditor, analyst, and board member was asking was the same: is that goodwill still worth what the books say it is?

This is the central question that Ind AS 36 — Impairment of Assets — exists to answer. And in India, it is a question that is no longer theoretical. The National Financial Reporting Authority (NFRA) issued its Series 4 Auditor-Audit Committee Interaction guidance in October 2025, with a specific focus on the impairment of non-financial assets under Ind AS 36. The message was direct: impairment testing in India lacks rigour, assumptions are being stretched, and goodwill is being carried at values that cannot withstand scrutiny.

An asset is impaired when its carrying amount exceeds the amount recoverable through its use or sale. The challenge is not the definition — it is the discipline required to apply it honestly.

For CFOs, audit committee members, and valuation professionals, Ind AS 36 is one of the most judgement-intensive standards in the Indian financial reporting framework. Its requirements touch directly on the quality of financial statements, the credibility of management estimates, and the integrity of reported earnings. Getting it wrong has consequences — not just in audit qualifications, but in regulatory scrutiny, investor confidence, and, increasingly, NFRA enforcement.

What Ind AS 36 Requires — The Core Framework

Ind AS 36, India’s equivalent of IAS 36 (IFRS), prescribes the procedures an entity must apply to ensure that its assets are not carried at more than their recoverable amount. Introduced as part of India’s convergence with IFRS, it replaced a regime under erstwhile Indian GAAP where impairment testing was largely reactive and rarely conducted with methodological rigour.

The central rule is simple: if an asset’s carrying amount exceeds its recoverable amount, the difference must be recognised as an impairment loss in the profit and loss statement. The recoverable amount is defined as the higher of:

1. Fair Value Less Costs of Disposal (FVLCD):

   The estimated price obtainable from selling the asset in an arm’s length transaction between knowledgeable, willing parties, minus the direct incremental costs of disposal.

2. Value in Use (VIU):

   The present value of future cash flows expected to be derived from continuing use of the asset or Cash-Generating Unit (CGU), including cash flows from its eventual disposal.

The standard is clear: if either of these two amounts exceeds the carrying amount, the asset is not impaired and there is no requirement to estimate the other. In practice, VIU is more commonly used for unlisted CGUs — since estimating FVLCD requires observable market transactions that often do not exist for privately held business units.

When Impairment Testing Is Required

Ind AS 36 establishes a two-tier system for when impairment testing must be conducted:

External Impairment Indicators

• Significant decline in market value during the period
• Adverse changes in technology, markets, economics, or legal environment
• Increase in market interest rates or market rates of return used to discount future cash flows
• Carrying amount of net assets exceeds market capitalisation of the entity

Internal Impairment Indicators

• Evidence of physical damage or obsolescence of an asset
• Significant adverse changes in the use of the asset or its expected use
• Internal reporting evidence that an asset’s economic performance is worse than expected
• Cash flows for acquiring the asset, or subsequent cash needs for operating or maintaining it, are significantly higher than originally budgeted

NFRA Alert (October 2025): NFRA’s Series 4 guidance specifically called out the common failure of entities to identify and act on impairment indicators promptly. Audit committees are now being asked to challenge management on whether internal reporting evidence — particularly budget misses and declining segment performance — is being appropriately escalated for impairment testing.

 THE CORE CONCEPT

Cash-Generating Units and Goodwill — Where It Gets Complex

When individual assets cannot generate cash flows independently, Ind AS 36 requires them to be grouped into Cash-Generating Units (CGUs) — the smallest identifiable group of assets that generates cash inflows largely independent of other assets or groups. The identification of CGUs is a critical judgement that must remain consistent from period to period.

Goodwill acquired in a business combination must be allocated to the CGU or group of CGUs expected to benefit from the synergies of the combination. Once allocated, goodwill must be tested for impairment annually — regardless of whether there are any indications of impairment. This is a significant departure from erstwhile Indian GAAP, where impairment testing of goodwill was only triggered by specific events.

• Under Ind AS 36, goodwill is no longer amortised. It sits on the balance sheet indefinitely unless an impairment test forces a writedown. This makes the rigour of the annual test the only safeguard against overstatement.

The impairment test for a CGU works as follows: the carrying amount of the CGU — including any goodwill allocated to it — is compared against its recoverable amount. If the carrying amount exceeds the recoverable amount, an impairment loss is recognised. Critically, the impairment loss is allocated first to reduce the goodwill allocated to the CGU, and then to the other assets of the CGU on a pro-rata basis.

NFRA Finding: NFRA’s October 2025 guidance flagged a common error: entities were extending cash flow forecast horizons beyond five years without adequate justification. Ind AS 36 restricts the VIU forecast period to five years unless a longer period can be explicitly justified. Extending forecasts indefinitely — particularly in declining businesses — is a direct compliance failure and a common basis for overstating recoverable amounts.

How Recoverable Amount Is Determined — The Valuation Mechanics

Value in Use — The DCF Framework

Value in Use is a specialised DCF concept that is unique to Ind AS 36. Unlike a standard DCF for business valuation purposes, the VIU framework has specific restrictions:

• Cash flows must be based on the asset in its current condition — not enhanced by uncommitted future restructuring, capital expenditure, or improvements.
• The forecast period is capped at five years for the explicit projection, with a terminal value applied beyond that period
• The discount rate must be a pre-tax rate reflecting current market assessments of the time value of money and asset-specific risks
• The discount rate must not include risks already reflected in the cash flow forecasts to avoid double-counting

The discount rate is typically derived using the Capital Asset Pricing Model (CAPM):

Discount Rate  =  Risk-Free Rate  +  Beta × (Equity Risk Premium)  +  Specific Risk Premium

Key inputs for the CAPM include the risk-free rate derived from government bond yields, a beta that captures sector-specific volatility, the equity market risk premium, and a specific risk premium for the company and its cash flows. For Indian entities, these inputs are sourced from RBI benchmark yields, market data providers, and Damodaran’s equity risk premium dataset — which is updated annually and provides India-specific risk premiums calibrated to sovereign credit ratings.

Fair Value Less Costs of Disposal — The Market Framework

FVLCD is estimated using the best available evidence of what a knowledgeable, willing buyer would pay in an arm’s length transaction, reduced by the direct costs of completing that transaction. In practice, this requires:

• Observable market prices if the CGU or asset is listed or has an active secondary market
• Comparable transaction multiples from M&A databases if market prices are unavailable
• An independent valuation opinion from a registered valuer for complex or contentious CGUs

For unlisted CGUs — which represent the vast majority of impairment testing situations in India — FVLCD is significantly harder to estimate than VIU. Accordingly, most Indian entities default to VIU as the primary method, testing FVLCD only when VIU produces a value below the carrying amount and management believes the disposal value may be higher.

Impairment Testing in Practice — An Illustrative Example

Illustrative Example — Arjun Textiles Limited (Manufacturing CGU)

(Fictionalised entity | Textile manufacturing sector | FY 2025-26)

Arjun Textiles acquired a competing manufacturer in FY 2022-23, recording goodwill of ₹85 crore. By FY 2025-26, the segment has experienced two consecutive years of revenue decline due to import competition. Management is required to perform an annual impairment test.

The ₹30 crore impairment loss is recognized in the profit and loss statement as an exceptional item. Goodwill is reduced from ₹85 crore to ₹55 crore. This loss cannot be reversed in future periods — Ind AS 36 prohibits the reversal of goodwill impairment losses, even if the business subsequently recovers.

Key Sensitivity: A 1% increase in the discount rate from 14.2% to 15.2% would reduce the VIU by approximately ₹18 crore, increasing the impairment charge to ₹48 crore. This sensitivity illustrates why the discount rate assumption is the most material and most scrutinised input in any impairment test — and why it must be documented with reference to market data, not management preference.

Common Failures in Ind AS 36 Compliance

Extending Forecast Periods Without Justification. Ind AS 36 restricts VIU cash flow forecasts to a maximum of five years unless a longer period can be explicitly justified with reference to the business’s maturity and stability. NFRA has cited instances of entities using nine-year forecast periods — effectively pushing impairment recognition into the distant future. When challenged, extended forecast periods have been reduced to five years, triggering material impairment charges that should have been recognised earlier.

Using Optimistic Growth Rates in Terminal Value. The terminal growth rate applied beyond the explicit forecast period must reflect a conservative, sustainable long-run growth assumption — typically anchored to long-run GDP growth or sector benchmarks. Using inflated terminal growth rates to artificially inflate VIU is a common technique for avoiding impairment recognition and is a specific area of NFRA audit focus.

Inconsistent CGU Identification Between Periods. Ind AS 36 requires consistency in the identification and composition of CGUs from one period to the next. Changing CGU boundaries — for example, combining a loss-making unit with a profitable one — can obscure impairment indicators and mask a deteriorating business. NFRA has specifically asked auditors to verify CGU consistency as part of their impairment audit procedures.

Ignoring Impairment Reversal Rules for Non-Goodwill Assets. While goodwill impairment can never be reversed, Ind AS 36 requires entities to assess whether previously recognised impairment losses on other assets should be reversed when conditions improve. Failing to reverse when appropriate understates assets and distorts reported profitability in recovery periods.

What Ind AS 36 Requires in the Notes to Accounts

Ind AS 36 mandates detailed disclosures for significant impairment losses and reversals. For each material CGU or group of CGUs carrying goodwill or intangible assets with indefinite lives, the following must be disclosed:

• The carrying amount of goodwill and intangible assets with indefinite lives allocated to the CGU
• The basis for determining recoverable amount — whether VIU or FVLCD
• The key assumptions used in the cash flow projections, including growth rates and the period over which management has projected those cash flows
• The discount rate(s) applied, and whether they reflect pre-tax or post-tax rates
• A sensitivity analysis showing the impact on recoverable amount of a reasonably possible change in the key assumptions

In practice, many Indian entities provide disclosure that technically complies but lacks the specificity that enables a reader to form an independent view. NFRA and SEBI have both flagged boilerplate impairment disclosures as an audit quality concern. The expectation is that disclosures are specific, quantified, and responsive to the actual circumstances of the business — not copied verbatim from the prior year.

The Impairment Testing Checklist — For CFOs and Audit Committees

• Identify CGUs Early and Consistently. Define CGU boundaries at the start of each reporting year and document any changes with supporting rationale before the impairment testing cycle begins.
• Assess Impairment Indicators Formally. At each reporting date, conduct a formal assessment of both external and internal impairment indicators. Do not rely on the absence of a management flag — budget misses, declining margins, and adverse market developments are indicators that must be independently assessed.
• Cap Forecast Periods at Five Years Unless Justified. Any extension of the explicit forecast period beyond five years requires documented justification. As a default, use five years with a conservative terminal value.
• Anchor the Discount Rate to Market Data. The discount rate must be derived from observable market data — government bond yields, sector betas, and Damodaran’s equity risk premium dataset. Management-preferred rates without market anchoring will not survive regulatory scrutiny.
• Stress-Test Key Assumptions. Model the impact of a 1% increase in discount rate and a 1% reduction in terminal growth rate. If these changes trigger impairment, the carrying amount is at the margin — and disclosure of that sensitivity is mandatory under Ind AS 36.
• Engage Independent Experts for Contentious CGUs. For CGUs with large goodwill balances or declining performance, an independent registered valuer’s opinion on the recoverable amount provides both audit support and regulatory defensibility.

Why Ind AS 36 Demands Practitioner-Level Rigour

Impairment testing is not a compliance exercise to be completed after year-end. It is a continuous economic assessment that should inform how management understands the real value of the assets it operates.

The NFRA’s October 2025 guidance was not issued in a vacuum. It reflects a regulatory determination that impairment disclosures in India lack the specificity and independence that investor confidence requires. As India’s capital markets deepen and cross-border scrutiny of Indian financial statements intensifies, the quality of impairment testing will become an increasingly visible measure of financial reporting credibility.

For CFOs, the message is practical: build your impairment testing process around documented assumptions, market-anchored discount rates, and independent validation for material CGUs. For audit committee members, the message is one of active oversight — the questions NFRA has published are the same questions you should be asking management every year.

For valuation professionals, Ind AS 36 represents one of the most technically demanding and commercially significant engagements in the financial reporting calendar. Done well, it protects the integrity of the balance sheet and provides shareholders with the honest economic picture they are entitled to.