Impairment reversals: calculate the depreciated-cost ceiling
A recovered asset value does not permit an unlimited reversal of a previous impairment. Rebuild the carrying amount that would exist without the impairment, after normal depreciation, before calculating the permitted increase. This task concerns relevant non-goodwill assets under IFRS; goodwill has a different no-reversal rule.
Establish the asset and framework
IAS 36 addresses impairment and reversals for assets within its scope, including the limit based on the carrying amount without prior impairment. This article uses a single cost-model equipment asset. It does not apply the same reversal mechanics to goodwill, inventories, financial assets or every asset measured under another standard. US GAAP long-lived-asset reversal rules also differ.
Identify the original impairment date, carrying value before and after the charge, remaining useful life, depreciation method and any subsequent additions or disposals. Then inspect the evidence supporting a changed recoverable amount. A higher market quotation alone may not reproduce the issuer’s complete recoverability analysis.
Hypothetical depreciated-cost ceiling
Assume equipment has a carrying amount of 100 thousand immediately before impairment. It is written down to 60 and has five years of remaining life with no residual value. Assume straight-line depreciation and no further changes. A year later, its carrying amount is 48: 60 minus annual depreciation of 12.
Without the impairment, annual depreciation would have been 20 and the comparable carrying amount would be 80. Now assume a supported recoverable amount of 90 and that reversal conditions are met. The permitted carrying amount is capped at 80 in this simplified cost-model case. Reversal is therefore 32, calculated as 80 minus 48, not 42 from raising the asset all the way to 90.
| One-year-later panel | Hypothetical amount |
|---|---|
| Actual carrying amount before reversal | 48 |
| Carrying amount without impairment | 80 |
| Assumed recoverable amount | 90 |
| Relevant ceiling in this example | 80 |
| Illustrative reversal | 32 |
A second sensitivity checks the other limit. If recoverable amount were only 70, the reversal would be 22, leaving carrying value 70. The ceiling of 80 is not a target value that must be reached whenever conditions improve.
Check the next year’s expense
After the assumed reversal to 80, four years remain. With unchanged life and zero residual value, annual depreciation becomes 20. It would have remained 12 without reversal. The reversal’s current profit benefit therefore accompanies higher future depreciation under these assumptions.
Do not count the 32 increase as new cash inflow or ignore the later expense when describing normalized profit. Equally, an analyst should not remove the reversal while retaining the prior impairment’s lower depreciation indefinitely without explaining the resulting inconsistency.
Build two parallel asset tracks
Track actual carrying value through impairment, depreciation, additions, reversals and disposals. Beside it, maintain the counterfactual no-impairment carrying value using the relevant depreciation history. Changes in useful life or residual value must be considered consistently rather than preserving a convenient original denominator.
For a cash-generating unit, allocation among assets and individual asset limits add complexity. A group reversal cannot automatically be spread pro rata without checking the applicable restrictions. Keep goodwill separately identified so that a unit-level recovery is not described as permission to reverse goodwill.
Observe improved utilization, resolved damage, changed demand, market recovery and updated cash-flow forecasts, while distinguishing new evidence from optimism. A later sale can offer additional evidence but should not erase the assumptions that applied at the reversal date.
Public notes may disclose a reversal total without the depreciation history needed to reproduce the ceiling. State that gap. The final memo should identify the eligible asset, supported recoverability change, ceiling calculation and future depreciation effect, keeping a useful accounting bridge separate from an unsupported claim about investment value.
Keep the ceiling worksheet dated. A later useful-life revision may change future depreciation and the relevant counterfactual track, requiring an updated calculation rather than reuse of eighty.
FAQ
Can goodwill impairment be reversed under the same example?
No. This article expressly excludes goodwill from the illustrated reversal path.
Does recoverable amount of 90 permit carrying value of 90 here?
No. The depreciated no-impairment amount of 80 is the tighter assumed ceiling.