Section 27 of FRS 102 requires a business to look for indicators of impairment at every reporting date and, only where there is an indicator, to estimate the asset’s recoverable amount: the higher of fair value less costs to sell and value in use. If recoverable amount is below carrying amount, the asset, or the cash generating unit it belongs to, is written down. Impairment losses on assets other than goodwill are reversed if the reasons for them cease to apply, but a goodwill impairment is never reversed.

Which assets does Section 27 cover?

Section 27 applies to property, plant and equipment, intangible assets, goodwill, investments in associates and joint ventures, right of use assets and inventories. Paragraph 27.1 excludes assets dealt with elsewhere, including deferred tax assets, employee benefit assets, financial assets within Sections 11 and 12, investment property measured at fair value, and contract assets and contract costs under Section 23.

Inventories have their own simpler test. At each reporting date the carrying amount of each item, or group of similar items, is compared with selling price less costs to complete and sell, and any shortfall is written off immediately (paragraphs 27.2 and 27.3). The write down is reversed if the circumstances that caused it no longer exist, but only up to the original loss (paragraph 27.4). This is covered in stock valuation. The rest of this page deals with other assets.

When does a business need to test for impairment?

Paragraph 27.7 requires an assessment at each reporting date of whether there is any indication that an asset may be impaired. If there is none, recoverable amount does not need to be estimated. Paragraph 27.9 lists the indicators that must be considered as a minimum.

External indicators

  • a decline in the asset’s market value significantly more than expected from the passage of time or normal use;
  • significant adverse changes in the technological, market, economic or legal environment;
  • increases in market interest rates or rates of return likely to affect the discount rate materially;
  • net assets in the balance sheet exceeding the estimated fair value of the entity as a whole.

Internal indicators

  • evidence of obsolescence or physical damage;
  • significant adverse changes in how the asset is used, such as becoming idle, plans to discontinue or restructure the operation, or plans to dispose of it early;
  • internal reporting showing that the asset’s economic performance is, or will be, worse than expected.

Even if no loss results, an indicator may mean the useful life, depreciation method or residual value should be reviewed (paragraph 27.10). A business with persistent losses should also consider its going concern assessment at the same time.

How is recoverable amount measured?

Recoverable amount is the higher of fair value less costs to sell and value in use (paragraph 27.11). Only one needs to be calculated if it already exceeds the carrying amount (paragraph 27.12), and where there is no reason to think value in use materially exceeds fair value less costs to sell, the latter may be used, as is often the case for an asset held for disposal (paragraph 27.13).

Fair value less costs to sell

This is based on fair value as set out in Section 2A, taking account of restrictions on sale or use (paragraphs 27.14 and 27.14A).

Value in use

Value in use is the present value of the future cash flows expected from the asset (paragraph 27.15). Paragraphs 27.17 to 27.20 set the rules:

  • cash flows come from continuing use and ultimate disposal, and may be based on recent budgets, extrapolated beyond the budget period at a steady or declining growth rate unless an increasing rate can be justified;
  • financing cash flows and income tax receipts or payments are excluded;
  • the asset is valued in its current condition, ignoring restructurings not yet committed to and future improvements;
  • the discount rate is a pre tax rate reflecting the time value of money and risks not already reflected in the cash flows.

For assets held for their service potential rather than to generate cash, such as some assets of public benefit entities, value in use may instead be measured by remaining service potential, and depreciated replacement cost may be suitable (paragraph 27.20A).

What is a cash generating unit and how is a loss allocated?

Many assets, such as a shop fit out or a delivery van, do not generate cash flows on their own. Paragraph 27.8 then requires recoverable amount to be estimated for the cash generating unit, defined as the smallest identifiable group of assets that generates cash inflows largely independent of those from other assets. A single shop in a chain, or one product line, is often a unit.

A loss on a unit is allocated first to any goodwill allocated to it, then to the other assets pro rata to their carrying amounts (paragraph 27.21). No asset is reduced below the highest of its own fair value less costs to sell, its value in use and zero, and any excess is reallocated to the other assets (paragraphs 27.22 and 27.23). Goodwill is tested through the units expected to benefit from the acquisition (paragraphs 27.24 and 27.25); where it cannot be allocated on a non arbitrary basis, it is tested using the acquired entity as a whole, or the whole group if the business has been integrated (paragraph 27.27). Goodwill amortisation is covered in goodwill useful life and amortisation.

What does a worked example look like?

Illustration only. A retailer’s loss making shop is a cash generating unit. Its assets are goodwill from buying the shop of £20,000, fit out of £60,000 and equipment of £20,000: a total of £100,000. Value in use is £70,000 and fair value less costs to sell is £50,000, so recoverable amount is £70,000 and the impairment loss is £30,000.

Asset Before Impairment After
Goodwill £20,000 £20,000 Nil
Fit out £60,000 £7,500 £52,500
Equipment £20,000 £2,500 £17,500
Total £100,000 £30,000 £70,000

The remaining £10,000 after goodwill is split 60:20 between fit out and equipment. If the equipment could be sold for £19,000, its floor would be £19,000 and the extra £1,500 would be pushed onto the fit out. Future depreciation is based on the reduced amounts.

Can an impairment loss be reversed?

A goodwill impairment is never reversed (paragraph 27.28). For other assets, the business assesses at each reporting date whether the reasons for an earlier loss have ceased to apply, and if so reverses all or part of it (paragraph 27.29). The reversal cannot take the asset above the carrying amount it would have had, net of depreciation, if no loss had been recognised (paragraph 27.30(c)). For a unit, the reversal goes to the assets other than goodwill, pro rata, with each asset capped at the lower of its recoverable amount and its depreciated historical amount (paragraph 27.31). Depreciation is then recalculated on the revised amount.

Losses and reversals go to profit or loss, except for assets carried at a revalued amount, where they are treated as a revaluation decrease or increase under the relevant section (paragraphs 27.6 and 27.30(b)). See revaluation of fixed assets.

What must be disclosed, and how do micro entities differ?

Paragraph 27.32 requires the amounts of impairment losses and reversals in profit or loss, and the line items that include them, for each class listed in paragraph 27.33: inventories, property, plant and equipment, right of use assets, goodwill, other intangible assets, and investments in associates and joint ventures. Paragraph 27.33A requires a description of the events and circumstances that led to the loss or reversal.

Micro entities apply Section 22 of FRS 105, which uses the same indicators and the same recoverable amount test, and refers back to Section 27 of FRS 102 for cash generating units and goodwill (paragraphs 22.3, 22.4 and 22.7).

How is an impairment treated for tax, and what goes wrong?

HMRC’s Business Income Manual at BIM35030 explains that depreciation is disallowed for tax because it is capital, and that capital expenditure is not allowable in computing trading profits; an impairment of a tangible fixed asset is a write down of the same capital cost, with relief coming through capital allowances where available. Intangible fixed assets within Part 8 of the Corporation Tax Act 2009 are different: section 729 gives a tax debit corresponding to a loss recognised in the accounts as a result of an impairment review. See intangible assets under FRS 102.

Common mistakes include not documenting the indicator review when no test is needed, using post tax discount rates or including financing cash flows, assuming improvements that have not been committed to, reversing a goodwill impairment, and reversing other losses above the depreciated historical amount.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.