Standard, IFRS

IAS 36 Impairment of Assets

Standard

IAS 36 ensures assets are carried at no more than their recoverable amount. It sets the impairment indicators to review at each reporting date IAS 36 §12, defines recoverable amount as the higher of fair value less costs of disposal and value in use IAS 36 §18, and specifies the elements of value in use IAS 36 §30. For token capitalisation it governs model-obsolescence write-downs.

The indicator review

At each reporting date an entity assesses whether there is any indication that an asset may be impaired, considering a minimum list of external and internal indicators IAS 36 §12. External indicators include adverse changes in the technological or market environment; internal indicators include evidence of obsolescence. Both bite readily on AI assets, where a superseding model or an announced deprecation is a recognisable indicator.

Recoverable amount

Where an indicator exists, the asset is tested by comparing its carrying amount to its recoverable amount, the higher of fair value less costs of disposal and value in use IAS 36 §18. For a bespoke internal model with no observable market, value in use usually governs.

Value in use

Value in use is the present value of the future cash flows expected from the asset, reflecting those cash flows, expectations about their possible variations, the time value of money at a current risk-free rate, and the price for bearing the asset-specific uncertainty IAS 36 §30. The asset-specific risk of a fast-obsoleting model is high, which lowers value in use.

Loss and reversal

If recoverable amount is below carrying amount, the asset is written down to recoverable amount and the loss recognised in profit or loss IAS 36 §18. IAS 36 permits a later reversal for an intangible other than goodwill where the indicators reverse and recoverable amount recovers, capped at the carrying amount that would have existed absent the original loss. For AI assets reversals are uncommon, because obsolescence rarely reverses.