Which standard governs impairment of tangible and finite-life intangible assets, and how is impairment measured?

• A. IAS 38 governs impairment; impairment is measured only by fair value.
• B. IFRS 16 impairment; measured by present value of future cash flows.
• C. IAS 2 inventories; impairment measured by net realizable value.
• D. IAS 36 impairment governs impairment of tangible and finite-life assets, measurement by recoverable amount (higher of value in use and fair value less costs of disposal) compared to carrying amount.

Answer: (D)

Impairment of tangible assets and finite-life intangible assets is governed by IAS 36. The measurement hinges on the recoverable amount, which is the higher of value in use and fair value less costs of disposal. You compare this recoverable amount with the asset’s carrying amount, and if the carrying amount is higher, you recognize an impairment loss to reduce the carrying amount to the recoverable amount. Value in use is the present value of the expected future cash flows from using the asset and from its eventual disposal. Fair value less costs of disposal reflects the price obtainable in an orderly market transaction, minus costs to sell. This approach ensures assets aren’t carried at more than the amount expected to be recovered. The other standards address different areas—IAS 38 for intangible asset recognition/measurement, IFRS 16 for leases, and IAS 2 for inventories using net realisable value.