Impairment testing — recoverable amount of assets

When the balance sheet promises more than the asset delivers

The principle behind CPC 01 is simple and strict: no asset may remain on the balance sheet at an amount higher than what the company can recover, whether by using the asset or by selling it. When the carrying amount exceeds the recoverable amount, the difference is an impairment loss — and it must be recognized in profit or loss.

The test is mandatory whenever there is an indication of impairment, and mandatory every year, regardless of any indication, for goodwill arising from expected future profitability and for indefinite-lived intangibles. In practice, it is one of the areas auditors scrutinize most closely — and one of those that depend the most on engineering assumptions, not just finance.

When the test is required

• External indications of impairment — a significant decline in market value, an adverse change in the business, technological or regulatory environment, an increase in interest rates affecting the discount rate.
• Internal indications — obsolescence or physical damage, idleness, economic performance below expectations, plans to discontinue or restructure the unit.
• Mandatory annual test — for goodwill and indefinite-lived intangibles, regardless of any indication.
• A period-end close under auditor scrutiny — a qualification or recommendation concerning the recoverability of fixed or intangible assets.
• Restructurings — discontinuation of units, plant mothballing and asset decommissioning.

What we do

• Identification of cash-generating units — defining the smallest group of assets that generates independent cash inflows, and allocating the asset base, goodwill and corporate assets to each CGU.
• Value in use — discounted cash flow with technical assumptions verified through on-site inspection: installed and effective capacity, remaining useful life, maintenance cost and replacement capex.
• Fair value less costs of disposal — determined from a market perspective, in accordance with CPC 46 / IFRS 13, where this is the relevant measure.
• Loss measurement and allocation — comparing the recoverable amount with the carrying amount, allocating the loss across the CGU's assets and analyzing reversal in subsequent periods, where applicable.
• Sensitivity analysis — variation of the discount rate, perpetuity growth and margin, with a break-even schedule for the financial statement disclosure note.
• Audit support — assumptions memorandum, an open and auditable model and responses to auditor inquiries through to the close.

Methodology

1. Scope definition — identification of the CGUs, the level of aggregation and the asset base allocated to each unit.
2. Technical diagnosis — on-site inspection of the assets, verification of installed and effective capacity, state of repair, remaining useful life and reinvestment needs.
3. Assumption building — volumes, prices, costs, maintenance capex and working capital, based on the approved budget and historical results.
4. Modeling — discounted cash flow with a discount rate consistent with the asset's risk, an explicit horizon and a substantiated terminal value.
5. Comparison and measurement — comparing the recoverable amount with the carrying amount, determining and allocating the loss.
6. Report — assumptions memorandum, an open and auditable model, sensitivity analysis and a draft disclosure.

Deliverables