When Is Impairment Testing of Investments Mandatory Under Ind AS 36?

If your company holds an investment in a subsidiary, associate, or joint venture that has underperformed, faced a valuation markdown, or lost a major customer, your auditor may already be asking one question you cannot defer: has this investment been tested for impairment under Ind AS 36? Getting the answer wrong carries real consequences — a qualified audit opinion, a restated financial statement, or a return visit from the auditor mid-cycle. This article sets out exactly when impairment testing becomes mandatory, and when it does not.

1. The Short Answer

Impairment testing under Ind AS 36 is not an annual ritual for every asset. For most assets — including investments in subsidiaries, associates, and joint ventures carried at cost in standalone financial statements — testing is mandatory only when a trigger event indicates the asset’s carrying value may not be recoverable. Two categories of assets are the exception: goodwill and intangible assets with an indefinite useful life (or not yet available for use) must be tested at least annually, trigger or no trigger.

This distinction — trigger-based testing versus mandatory annual testing — is where most compliance gaps arise. Boards and finance teams reasonably assume that no obvious “bad news” means no obligation to test. Ind AS 36 does not work that way for goodwill, and the definition of a “trigger” is broader than most people expect.

2. What Ind AS 36 Actually Requires

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. If such an indication exists, the entity must estimate the asset’s recoverable amount — the higher of fair value less costs of disposal and value in use — and compare it against carrying value. Where carrying value exceeds recoverable amount, the shortfall is recognised as an impairment loss in the statement of profit and loss.

For goodwill and indefinite-life intangible assets, the standard removes the judgment call: these must be tested for impairment at least once every year, regardless of whether any trigger is present, and irrespective of whether there is any indication of impairment.

Note: IFRS-reporting entities and entities in jurisdictions applying IAS 36 face substantively the same trigger-based and annual-testing framework — Ind AS 36 is drafted in near-identical terms to its IFRS counterpart, so the analysis in this article applies equally under IAS 36, with only presentation and disclosure differences under the applicable GAAP.

3. Trigger Events — The Checklist

Ind AS 36 sets out indicative external and internal sources of information that, if present, obligate the entity to perform an impairment test. This list is illustrative, not exhaustive — an entity must exercise judgment as to whether other circumstances amount to an indication of impairment.

3.1 External Indicators

1. A significant decline in the asset’s market value, beyond what would be expected from the passage of time or normal use
2. Significant adverse changes in the technological, market, economic, or legal environment in which the entity operates, or in the market to which the asset is dedicated
3. An increase in market interest rates or other market rates of return likely to affect the discount rate used in estimating value in use, materially reducing the recoverable amount
4. The carrying amount of the entity’s net assets exceeding its market capitalisation

3.2 Internal Indicators

5. Evidence of obsolescence or physical damage to an asset
6. Significant adverse changes in the extent or manner in which an asset is used or is expected to be used — including plans to discontinue, restructure, or dispose of the operation to which the asset belongs
7. Evidence from internal reporting that the economic performance of an asset is, or will be, worse than expected — for example, cash flows, operating results, or net cash flows for maintaining the asset that are significantly worse than budgeted

For an investment in a subsidiary, associate, or joint venture specifically, common triggers include sustained losses in the investee, a fall in the investee’s own net worth below the carrying value of the investment, loss of a key customer or contract by the investee, delayed or abandoned business plans, or a markdown in a recent funding round or share transaction involving the investee.

4. Mandatory or Not — Decision Matrix

The table below maps common scenarios finance teams encounter to a mandatory / not-mandatory conclusion under Ind AS 36. This is indicative and does not substitute for an assessment of the entity’s specific facts.

Scenario	Asset Category	Testing Position
No trigger identified; investee performing in line with plan	Investment in subsidiary / associate / JV	Not mandatory this period
Investee reported losses for two consecutive years against budget	Investment in subsidiary / associate / JV	Mandatory — internal trigger
Recent equity round priced the investee below the carrying value on your books	Investment in subsidiary / associate / JV	Mandatory — external trigger
Any reporting period, regardless of performance	Goodwill	Mandatory — annual, trigger irrelevant
Any reporting period, regardless of use	Indefinite-life intangible / not yet available for use	Mandatory — annual, trigger irrelevant
Market interest rates have risen materially since last valuation	Any asset valued on a value-in-use basis	Mandatory — external trigger
Investee has lost its largest customer or a key contract	Investment in subsidiary / associate / JV	Mandatory — internal trigger

5. How the Test Is Performed

Once a trigger is identified (or for goodwill / indefinite-life intangibles, at each annual date), the entity determines the recoverable amount of the asset or the cash-generating unit (CGU) to which it belongs, and compares this to carrying value:

1. Recoverable amount = higher of Fair Value less Costs of Disposal (FVLCD) and Value in Use (VIU)
2. Value in Use is generally estimated as the present value of future cash flows expected from the asset or CGU, discounted at a rate reflecting current market assessments of the time value of money and asset-specific risks — typically built through a discounted cash flow (DCF) model
3. If recoverable amount exceeds carrying value, no impairment is recognised, and it is not necessary to determine both FVLCD and VIU — whichever is established first as exceeding carrying value is sufficient
4. If carrying value exceeds recoverable amount, the difference is recognised immediately as an impairment loss in the statement of profit and loss

In practice, for an investment in a subsidiary or associate, this exercise is typically performed as a Value-in-Use computation using a discounted cash flow of the investee’s projected free cash flows, benchmarked against the carrying value of the investment in the parent’s standalone books.

6. Consequences of Skipping a Required Test

• Statutory auditors are required to assess impairment indicators as part of the audit — an untested investment with visible red flags is a common qualification or emphasis-of-matter point
• A material impairment identified late can force a restatement of previously issued financial statements
• For listed entities and their subsidiaries, an unaddressed impairment trigger can attract regulatory scrutiny from SEBI or the NFRA on financial reporting quality
• Lenders and investors reviewing covenant compliance or fresh funding rounds increasingly expect impairment testing to be current and documented

7. Practical Takeaway

Do not wait for year-end to ask the impairment question. Build a light-touch quarterly checklist against the external and internal indicators in Section 3 as part of your regular financial close — goodwill and indefinite-life intangibles go on the annual testing calendar regardless of triggers; everything else gets tested only when a trigger is flagged, but that flag needs someone actively looking for it.

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Get in Touch

If you are evaluating whether an investment, subsidiary, or CGU requires impairment testing this reporting period, we offer a complimentary 30-minute consultation to walk through your specific facts.

Marcken Consulting LLP — IBBI-Registered Valuer (Securities or Financial Assets)
Website: marckenconsulting.com
Phone: +91 99980 59923 / +91 99985 39902
Email: crm@marckenconsulting.com

This article is intended for general informational purposes and does not constitute professional advice. Please consult your valuer or auditor for an assessment specific to your facts.