What is Impairment Testing?
Impairment testing is the periodic assessment under IAS 36 that compares an asset’s carrying amount to its recoverable amount (the higher of fair value less costs to sell and value in use), recognizing an impairment loss when the carrying amount exceeds the recoverable amount.
How It Works
- Annual test for goodwill and indefinite-life intangibles.
- Triggered test for other assets when indicators arise.
- Recoverable amount = max(fair value – costs to sell, value in use).
- Value in use uses pre-tax discounted cash flows over the asset’s useful life.
Saudi Context
Saudi companies that grew through acquisition (banks, telcos, real estate developers) carry significant goodwill that must be tested for impairment annually. The 2020 oil price shock triggered widespread impairment charges across Saudi petrochemicals and downstream, with Tadawul-listed entities disclosing impairment losses in the hundreds of millions of riyals.
Example
A Saudi cement plant has a carrying value of SAR 80,000,000 and a recoverable amount (value in use) of SAR 65,000,000. Impairment loss = 80,000,000 – 65,000,000 = SAR 15,000,000, charged to P&L.