When the Clouds Clear - Reversal of Impairment under IAS 36

It was the first quarter after a challenging year.
The CFO dashboard finally looked brighter, sales were recovering, and margins were improving.

Yet one figure from the previous year’s financial statements continued to draw attention:

“Impairment loss – AED 12 million (Plant & Machinery).”

Now that the market had turned and operations were running at full capacity, the CEO asked a logical question:

“Can we write it back? The plant is performing better than ever.”

That question marked the beginning of a more complex exercise, the test of professional judgment.

Understanding the Reversal of Impairment

Under IAS 36 – Impairment of Assets, the reversal of an impairment loss is not a matter of optimism; it is a matter of evidence.
A reversal can only be recognized when there has been a change in the estimates used to determine the recoverable amount of the asset at the time of impairment. Improved profits or market sentiment alone are not sufficient grounds.

Steps to Evaluate a Reversal

1. Identify the cause of impairment
Determine what led to the impairment in the first place, was it reduced demand, regulatory restrictions, or technological obsolescence?
If the underlying cause has changed or ceased to exist, then, and only then, can the possibility of a reversal be considered.

2. Recalculate the recoverable amount
Reassess the asset’s value in use or fair value less costs of disposal, using updated and supportable assumptions that reflect current market conditions and performance expectations.

3. Apply the ceiling rule
Even when a reversal is justified, the carrying amount after reversal cannot exceed the amount that would have been determined (net of depreciation or amortization) if no impairment loss had been recognized previously.

4. Goodwill – the exception
Reversals do not apply to goodwill.
IAS 36, paragraph 124, explicitly prohibits the reversal of impairment losses recognized for goodwill, even if the conditions that caused the impairment have improved.

The Outcome

In our case, after thorough analysis, we determined that AED 5 million of the previously recognized impairment could be reversed.
The decision was not based on management optimism, but on objective evidence and recalculated recoverable values.

Key Takeaway

Reversal of impairment is not an act of celebration; it is an act of correction.
It demonstrates discipline in revisiting assumptions and aligning financial statements with updated economic realities.

When the clouds clear, be encouraged, but verify before you reverse.

Author: CA Ramesh Jha