A practical approach to impairment testing for fixed assets starts with identifying genuine indicators of impairment — idle or underutilised plant, technological obsolescence, a loss-making unit, or a sustained drop in the asset's market or operating value — rather than running a formal discounted cash flow exercise on every asset by default. Where an indicator is present, the audit test is to review management's estimate of the asset's recoverable amount — the higher of fair value less costs of disposal and value in use — and assess whether the assumptions behind it are reasonable and consistent with other evidence in the file.

Ind AS 36, applied at the scale that fits

Ind AS 36 requires an entity to assess at the end of each reporting period whether there is any indication that an asset may be impaired, and to estimate the recoverable amount only where such an indication exists. For a listed company with large, discrete cash-generating units, this often means a formal model with discounted cash flows, a discount rate derived from a weighted average cost of capital, and a terminal value. For a mid-market Tally-based client, the same standard applies, but the assessment that fits is usually much simpler — because the indicators themselves are usually obvious once looked for, and the recoverable amount is often closer to a scrap or resale value than a discounted cash flow model.

Regulatory requirement

Ind AS 36 (and AS 28 under the Companies (Accounting Standards) Rules for non-Ind AS companies) requires assessing impairment indicators at each reporting date and estimating recoverable amount only when an indicator exists — it does not require a full impairment model to be run on every asset every year regardless of indicators.

The indicators that actually show up on a mid-market audit

Impairment indicators worth checking for on a plant and machinery block
Indicator	Where to look for it	What it suggests
Idle or significantly underutilised plant	Production records, machine utilisation logs, the physical verification walk-through	A machine not run for an extended period may no longer generate the cash flows its carrying amount assumes
Technological obsolescence	Management discussion of product lines, loss of a customer tied to a specific product, a newer-generation machine purchased for the same function	An asset still on the books at cost may have lost most of its economic relevance even though it is not yet fully depreciated
A loss-making segment or product line	Segment or product-wise profitability, where maintained; otherwise, the overall P&L trend for the relevant plant	Assets dedicated to a loss-making line are the first candidates for a recoverable amount check
Carrying amount of net assets exceeding market capitalisation	Applicable mainly to listed clients	An external indicator that the market is pricing the business below its book value
Significant decline in an asset's market value	Resale quotations, scrap dealer valuations for machinery clearly being phased out	A fall well beyond what normal use and the passage of time would explain
Evidence of physical damage or obsolescence from an external event	Insurance claims, incident reports, a flood or fire affecting a specific facility	A direct, often undisputed, trigger for testing the affected assets specifically

Impairment indicators worth checking for on a plant and machinery block

Common practice, not a requirement

In practice, for most mid-market clients, the strongest signal an audit team gets is qualitative and operational — a plant manager mentioning a machine has not run this year, or a line that has been shut since a customer was lost — rather than anything that shows up directly in a financial ratio. Asking operations, not just accounts, is often the more productive starting point than a purely analytical review of the numbers.

When a formal test is genuinely warranted

Not every indicator calls for the same depth of response. A single idle machine worth a modest sum against total assets rarely needs a discounted cash flow model — a comparison to its resale or scrap value is usually sufficient to conclude. A formal, documented recoverable amount estimate becomes necessary when the asset or group of assets affected is material, when the indicator points to a structural rather than temporary issue, or when the asset cannot sensibly be valued on its own and needs to be assessed as part of a cash-generating unit.

Material value at risk relative to the materiality set for the engagement — a small idle asset does not need the same rigour as a plant representing a meaningful share of the balance sheet.
Whether the issue looks structural (a discontinued product, a lost major customer, obsolete technology) rather than a short, explainable dip in utilisation.
Whether the asset generates cash flows independently or only as part of a larger group of assets — if only the latter, the cash-generating unit, not the individual asset, is the right unit of analysis.
Whether management has already recognised the issue internally — a provision discussion, a board note on a loss-making line, or a decision to shut a facility — which usually means a formal estimate is overdue rather than optional.

Testing management's recoverable amount workings

01Confirm which basis management has usedFair value less costs of disposal, or value in use. For a specific machine with an active resale market, fair value less costs of disposal — supported by a dealer quotation or similar evidence — is often simpler and more reliable than a cash flow projection.
02For fair value less costs of disposal, test the source of the valuationA quotation from an independent dealer or valuer, dated reasonably close to the balance sheet date, with the costs of disposal (dismantling, transport, selling commission) deducted explicitly rather than ignored.
03For value in use, scrutinise the cash flow projectionsCheck that the projections are based on reasonable and supportable assumptions, cover a reasonable forecast period, and are consistent with the business plan management uses for other purposes — a projection built solely to produce a favourable impairment conclusion, inconsistent with the budget used internally, is a red flag.
04Challenge the discount rate usedThe rate should reflect current market assessments of the time value of money and the risks specific to the asset, not simply the company's borrowing rate used for convenience. For most mid-market clients a simplified, well-reasoned rate is acceptable as long as it is not arbitrary.
05Check the comparison against the right carrying amountRecoverable amount is compared against the asset's carrying amount — cost less accumulated depreciation — as at the balance sheet date, not against an earlier or rounded figure.
06Confirm the impairment loss, if recognised, is accounted for correctlyCharged to the P&L (or, for a revalued asset, first against any revaluation surplus for that asset), and the asset's subsequent depreciation charge recalculated on the reduced carrying amount going forward.

A management conclusion of 'no impairment' with no analysis behind it is not evidence of anything, even where it happens to be the right answer. Where a genuine indicator exists — a plant that has been idle for over a year is the clearest example — the absence of any recoverable amount estimate at all is itself the audit finding, independent of whether an impairment ultimately turns out to be needed.

Documenting the conclusion

The indicators considered and the basis for concluding whether each was present, even where the conclusion is that no indicator exists.
Where an indicator is present, the depth of response applied and why it was considered proportionate.
The recoverable amount basis used, the source evidence relied on, and the audit team's assessment of its reasonableness.
The comparison to carrying amount and the resulting conclusion, including any impairment loss recognised and its accounting treatment.

How we think about this

Screening a fixed asset register for idle time, age against useful life, and value concentration is work a computer can do across every asset every period, surfacing the handful that actually warrant a conversation. Deciding whether an idle machine still has a future, and what a fair recoverable amount for it looks like, is a judgement call that depends on knowing the business — it is not something a model should be asked to conclude on its own.

This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.

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Impairment testing for fixed assets: a practical approach