(This article was published on 26 November 2024 and updated on 18 March 2025)
IAS 36 Impairment of Assets requires a company to assess at each reporting date whether there is any indication that an asset or cash-generating unit (CGU) may be impaired1. The accounting standard also contains a non-exhaustive list of internal, external and other indicators of impairment. [IAS 36.9, 12–13]
Although climate-related factors, such as those in the diagram below, are not mentioned explicitly in IAS 36, they could lead to one or more of the internal or external indicators of impairment listed in the accounting standard.
Climate-related impairment indicators can be present in companies across all sectors or industries – they are not confined to a specific sector or industry.
Your questions answered
Yes. Transitioning to a lower carbon economy or a change in climate-related legislation may trigger some of the indicators of impairment listed in IAS 36. Furthermore, the list of indicators in IAS 36 is not exhaustive – a company may identify other risks that indicate that an asset or CGU may be impaired.
Climate-related impairment indicators can be present irrespective of sector or industry.
IAS 36 includes the following non-exhaustive list of impairment indicators based on internal and external sources of information.
| Internal sources | External sources |
|
|
Yes. One example listed in IAS 36 is significant adverse effects in the technological, market, economic or legal environment in which the company operates. In the context of climate-related matters, this may include the following.
- A shift in customer preference towards sustainable products of the company’s competitors, which is expected to significantly decrease demand for the CGU's products.
- The introduction of emissions-reducing legislation that is expected to significantly increase manufacturing costs of a CGU, which will reduce the company’s operating profit margin.
- A transition to a lower carbon economy by some of the company’s key suppliers, which is expected to significantly increase the CGU’s costs of production and reduce its operating profit margin.
Another example listed in IAS 36 is an increase in market-required rates of return on investments that is likely to materially decrease the value in use of an asset or CGU – for example, investors may demand a higher rate of return to invest in a company or an industry that has become more exposed to climate-related risks. If this is likely to increase the discount rate used in the discounted cash flow (DCF) and materially decrease the recoverable amount of a CGU, then it is an indicator of impairment. [IAS 36.12(b)–(c)]
Yes. One example listed in IAS 36 is if the company’s internal reporting indicates that the economic performance of an asset or CGU is, or will be, worse than expected. [IAS 36.12(g)]
For example, a company may voluntarily commit to decarbonise its operations. As a consequence, it will need to significantly reduce certain activities and abandon property, plant and equipment (PP&E) earlier than planned.
The voluntary commitment is an indicator of impairment both for the PP&E that is to be abandoned earlier than planned and for the affected CGU.
[IAS 36.12(f)–(g)]
1 Irrespective of any indicator of impairment, IAS 36 requires goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use to be tested for impairment at least annually.
© 2025 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.