Asset impairment testing is the process of evaluating whether an asset’s carrying value exceeds its recoverable amount. If it does, the asset is impaired and must be adjusted accordingly.
This ensures that financial statements reflect true asset value, prevents overstatement, and supports audit transparency.
At Synergy Evolution, we support organisations in implementing systematic impairment assessments that align with GRAP, IFRS 36, and audit standards, ensuring compliance and financial integrity.
What Is Asset Impairment?
Asset impairment occurs when the recoverable amount of an asset (the higher of fair value less costs to sell and value in use) is less than its carrying amount in the financial statements.
In other words, if an asset can no longer generate the economic benefit originally expected, it needs to be written down.
Why Impairment Testing Matters
Failing to identify and adjust for impaired assets can result in:
- Overstated assets and net worth
- Audit qualifications and findings
- Misleading financial ratios
- Budgeting and capital planning errors
When to Test for Impairment
Under GRAP 21/26 or IFRS 36, entities must assess impairment when indicators of impairment exist. Common indicators include:
- Physical damage or obsolescence
- Significant declines in market value
- Changes in laws or economic environment
- Asset underperformance
- Plans to discontinue or dispose of the asset
Annual impairment reviews are mandatory for certain classes of assets, especially those with indefinite useful lives or under the revaluation model.
Practical Steps for Asset Impairment Testing
Step 1: Identify Indicators of Impairment
Review internal and external sources for signs that an asset may not perform as expected.
Step 2: Determine the Recoverable Amount
Use the higher of:
- Fair Value less Costs to Sell (FVLCTS)
- Value in Use (VIU): Present value of future cash flows expected from the asset
For non-cash-generating assets (e.g. public infrastructure), value in use is often estimated using service potential rather than cash flow.
Step 3: Compare Carrying Amount vs Recoverable Amount
- If carrying amount > recoverable amount, an impairment loss must be recognised.
- This loss is usually recognised in the Statement of Financial Performance.
Step 4: Adjust Asset Register and Financial Records
Update the asset register, depreciation schedules, and financial statements.
Step 5: Disclose in Notes to the Financial Statements
Include:
- Amount and nature of impairment loss
- Basis used for calculating recoverable amount
- Circumstances leading to impairment
Public Sector Considerations
In the public sector, impairment testing should consider service delivery potential rather than profitability.
For example:
- A damaged municipal road that cannot serve traffic
- A health clinic building closed due to safety concerns
- Infrastructure impacted by climate disasters or policy changes
How Synergy Evolution Can Help
Our team helps public and private entities conduct structured, standard-compliant impairment assessments by:
✅ Identifying relevant indicators of impairment
✅ Coordinating asset inspections and condition audits
✅ Supporting the calculation of fair value and service potential
✅ Updating registers and financial disclosures
✅ Ensuring audit alignment with GRAP 21, GRAP 26, and IFRS 36
With Synergy Evolution, your impairment reviews don’t just tick boxes—they add value, reduce audit risk, and improve financial accuracy.
Final Thoughts
Impairment testing isn’t just a financial exercise—it’s a cornerstone of good governance, accountability, and performance-based asset management.Â
Whether your organisation is managing roads, hospitals, equipment, or heritage assets, Synergy Evolution is here to ensure your assets are fairly valued, fully compliant, and audit-ready.
