Auditing Ind AS 36 — CGU identification and recoverable amount testing

Ind AS 36 requires an asset to be tested for impairment whenever an indicator exists, by comparing its carrying amount to its recoverable amount — the higher of fair value less costs of disposal and value in use — and the audit work has to start with whether management correctly identified the cash-generating unit (CGU), because an asset is rarely tested on its own: it is tested as part of the smallest identifiable group of assets that generates independent cash inflows, and getting that grouping wrong changes the answer before a single discount rate is even examined.

Sequence to follow in the audit

1. 01Test for impairment indicators firstExternal indicators (market value decline, adverse changes in the economic or regulatory environment, rising interest rates) and internal indicators (physical damage, restructuring, worse-than-budgeted performance) should be evaluated even at entities where management asserts no impairment is needed — a CGU with recurring operating losses is the most common missed trigger.
2. 02Challenge the CGU identificationConfirm the CGU is the smallest group generating independent cash inflows largely independent of other assets — not an artificially broadened unit chosen because a larger pool of cash flows makes the impairment disappear.
3. 03Assess whether fair value less costs of disposal or value in use was used, and whyWhere value in use is used, this is inherently the more judgemental route and typically where audit effort should concentrate.
4. 04Recompute the value-in-use model independently on a sample of key inputsCash flow projections should be based on the most recent board-approved budgets (typically capped at five years without specific justification for longer), with a terminal growth rate that does not exceed the long-term average growth rate for the products, industries or country of operation, discounted at a pre-tax rate reflecting current market assessments of the time value of money and asset-specific risks.
5. 05Trace the discount rate build-upA WACC-derived discount rate should be recomputed from observable inputs (risk-free rate, equity risk premium, beta, cost of debt), not accepted as a number carried forward from the prior year's valuation.

Goodwill — the one asset tested every year regardless of indicators

Goodwill allocated to a CGU is tested for impairment annually irrespective of whether any indicator exists, and the allocation of goodwill to CGUs at acquisition, and any reallocation on a subsequent restructuring, needs its own audit trail back to the purchase price allocation.