Impairment of manufacturing plants

When demand for a product falls or costs rise for good, the factory that makes it may be worth less than its carrying amount. IAS 36 sets out how to test it and how to spread any loss. This guide works through a factory impairment, including the floor that protects assets such as buildings, and explains how plants are grouped into cash-generating units.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. 3 minute read.

Short answer

Manufacturing plant impairment under IAS 36 is tested when there is an indicator, such as falling demand, idle capacity or a jump in energy costs. The manufacturer compares the carrying amount of the plant's cash-generating unit with its recoverable amount, the higher of value in use and fair value less costs of disposal, and writes down the difference. The loss is spread across the plant's assets, but no asset goes below its own fair value less costs of disposal. In this guide's example, a plant carried at 37.0 million with a value in use of 27.65 million is impaired by 9.35 million.

At a glance

Standard
IAS 36 Impairment of Assets
Tested when
There is an impairment indicator
Unit
Usually the plant or product line
Recoverable amount
Higher of value in use and FVLCD
Allocation
Pro rata, not below each asset's FVLCD
Reversal
Allowed, except goodwill
Impairment of manufacturing plantsStandard: IAS 36 Impairment of Assets; Tested when: There is an impairment indicator; Unit: Usually the plant or product line; Recoverable amount: Higher of value in use and FVLCD; Allocation: Pro rata, not below each asset's FVLCD; Reversal: Allowed, except goodwill.KEY FACTS AT A GLANCEImpairment of manufacturing plantsStandardIAS 36 Impairment ofAssetsTested whenThere is an impairmentindicatorUnitUsually the plant orproduct lineRecoverable amountHigher of value in useand FVLCDAllocationPro rata, not below eachasset's FVLCDReversalAllowed, except goodwillTax BakersImpairment of manufacturing plantsStandard: IAS 36 Impairment of Assets; Tested when: There is an impairment indicator; Unit: Usually the plant or product line; Recoverable amount: Higher of value in use and FVLCD; Allocation: Pro rata, not below each asset's FVLCD; Reversal: Allowed, except goodwill.KEY FACTS AT A GLANCEImpairment of manufacturing plantsStandardIAS 36 Impairment of AssetsTested whenThere is an impairment indicatorUnitUsually the plant or product lineRecoverable amountHigher of value in use and FVLCDAllocationPro rata, not below each asset's FVLCDReversalAllowed, except goodwillTax Bakers
Key facts at a glance, as set out in this guide.

Manufacturing plant impairment: a worked example

A manufacturer's plant makes a single product line whose demand is falling as customers switch to a newer technology. The plant's building is carried at 15.0 million and its machinery at 22.0 million. Forecast cash flows from the plant are 4.5 million a year for 10 years, and the pre-tax discount rate is 10%. A buyer would pay 25.0 million for the whole plant after costs, and the building alone could be sold for 14.0 million.

From carrying amount to recoverable amount (CU million)From carrying amount to recoverable amount (CU million)15Building+22Machinery-1Buildingwrite-down-8Machinerywrite-down28Recoverableamount
The building's sale value limits its share of the loss.
StepCU million
Carrying amount: building 15.0 + machinery 22.037.00
Value in use: 4.5 x 6.1446, the 10-year annuity factor at 10%27.65
Fair value less costs of disposal of the plant25.00
Recoverable amount, the higher of the two27.65
Impairment loss9.35

How is the loss allocated across the plant?

Pro rata to carrying amounts, the building would take 15.0 / 37.0 of the loss, 3.79 million, leaving it at 11.21 million. But no asset may be written down below the highest of its fair value less costs of disposal, its value in use if measurable, and zero. The building can be sold for 14.0 million, so its write-down is limited to 1.00 million, and the remaining 8.35 million goes to the machinery, leaving it at 13.65 million. Depreciation of both is then based on the new carrying amounts.

Which cash-generating unit is a plant in?

The smallest group of assets that generates largely independent cash inflows. A plant whose products are sold to customers is usually its own unit. A plant whose output is used by the group's other plants is still its own unit if there is an active market for that output, valued at market prices. Plants run as one network, where production is moved freely between sites to meet a shared order book, often form a single unit together. See cash-generating units.

Which impairment indicators matter for factories?

  • Falling demand or prices for the plant's products, or a lost major customer.
  • Idle or underused capacity, or a decision to close or mothball a line.
  • Rising input costs that cannot be passed on, such as energy, carbon or tariffs.
  • Technical obsolescence, and the manufacturer's market capitalisation falling below net assets.

What goes into value in use?

Cash flows from the plant in its current condition: sales less operating costs, before financing and tax, including the maintenance needed to keep it running. Benefits from restructuring the company has not committed to, or from future improvements that enhance the plant, are excluded. Forecasts beyond five years need a justified growth rate, and the discount rate reflects the risks of the plant's cash flows. The Impairment test model (Excel) sets out the calculation.

Can the impairment be reversed?

Yes. If demand recovers and the recoverable amount increases, the impairment is reversed, up to the carrying amount the assets would have had after normal depreciation without the impairment. Goodwill impairments are never reversed. See impairment reversals.

How does US GAAP differ?

Under ASC 360, a plant is impaired only if its carrying amount exceeds the undiscounted cash flows it will generate; only then is it written down to fair value. With undiscounted cash flows of 45 million against a carrying amount of 37 million, this plant would pass the US recoverability test and record no impairment, and US GAAP never allows reversals. See ASC 360 impairment, value in use and manufacturing accounting.

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Questions people ask

When is a manufacturing plant tested for impairment?

When there is an indicator, such as falling demand, idle capacity, rising costs that cannot be passed on, or technical obsolescence.

How is a plant's recoverable amount measured?

As the higher of its value in use, from discounted cash flows, and its fair value less costs of disposal.

How is an impairment loss allocated across a plant's assets?

Pro rata to carrying amounts, but no asset is reduced below its own fair value less costs of disposal, value in use or zero.

Can plant impairments be reversed under IFRS?

Yes, apart from goodwill, if the recoverable amount increases; US GAAP does not allow reversals.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 36 Impairment of Assets

Rules and fees change. If you are reading this long after October 6, 2026, confirm the figures with the source before you rely on them.

IAS 36Cash-generating units and corporate assetsIAS 36Calculating value in useManufacturingManufacturing accounting: the key IFRS issues

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This guide is general information. It is not tax or legal advice for your situation.