Climate risk in impairment testing

Where does climate risk in impairment testing show up?

At each reporting date, a company assesses whether there is any indication of impairment. External indicators in IAS 36 include significant adverse changes in the technological, market, economic or legal environment, which covers new carbon taxes, tighter emissions rules, bans on certain products and shifts in customer demand. If there is an indication, the company estimates the recoverable amount, the higher of fair value less costs of disposal and value in use. Goodwill and some intangible assets are tested every year regardless. See IAS 36 impairment and climate risk in the financial statements.

How should cash flows reflect climate risk?

Value in use cash flows must be based on reasonable and supportable assumptions representing management's best estimate of the economic conditions over the asset's remaining life, with greater weight given to external evidence. For climate, that means carbon costs on expected emissions, energy prices, changes in demand and prices, adaptation spending needed to keep the asset running, and a realistic closure date. Projections from budgets normally cover at most five years, with extrapolation after that, and an asset expected to close in 2040 has no cash flows beyond 2040. Cash flows from future improvements, such as carbon capture the company has not committed to, are excluded. See value in use.

Climate risk in impairment testing: a gas-fired power plant

A utility tests a gas-fired plant, a cash-generating unit with a carrying amount of US$ 800 million. Because the outcome depends heavily on climate policy, it uses the expected cash flow approach in IAS 36, calculating value in use under three scenarios consistent with those in its IFRS S2 scenario analysis, and weighting them by its assessment of their likelihood.

Weighted value in use is 822 million, 22 million above the carrying amount, so no impairment is recognised. The headroom is thin, so the company discloses the sensitivity: if the weights moved to 30%, 30% and 40%, value in use would be 730 million and the impairment 70 million. It also explains why its weights differ from the net zero scenario used to test the resilience of its strategy, which is a stress test rather than its best estimate. See IFRS S2 climate disclosures. See climate scenario analysis.

Should climate risk go in the cash flows or the discount rate?

Either can carry a risk, but not both. IAS 36 requires a pre-tax discount rate reflecting the time value of money and the risks specific to the asset for which the cash flow estimates have not been adjusted. Where scenarios or carbon costs are already in the cash flows, adding a climate premium to the discount rate counts the risk twice. Most companies put climate effects in the cash flows, where they can be explained and tested, and disclose that the discount rate does not include them.

Which carbon prices should be used?

For value in use, the company's best estimate, supported by external evidence such as emissions trading prices and published forecasts, and consistent with its other reporting, including its transition plan and sustainability disclosures. For fair value less costs of disposal, the prices market participants would use. Differences between the carbon price in the accounts and the one in the sustainability report should be explained. The IASB's November 2025 illustrative examples on uncertainties include an impairment test where future emission allowance prices are a key assumption requiring disclosure. See emissions allowances.

What must be disclosed?

For each significant cash-generating unit with goodwill or indefinite-lived intangibles, and for impairments recognised, IAS 36 requires the key assumptions, the approach used to set them, the forecast period, growth and discount rates, and, where a reasonably possible change in a key assumption would cause an impairment, the headroom and the change needed. Significant judgements and estimation uncertainty must also be disclosed, which from 2027 sits in IAS 8 under the IFRS 18 changes. Useful lives, residual values and decommissioning provisions should use the same closure dates; see climate and useful lives. See also cash-generating units.

How does US GAAP differ?

Under ASC 360, a long-lived asset group is first tested for recoverability against its undiscounted cash flows, and only if those fall short is it written down to fair value, so the same carbon assumptions may trigger an impairment under IFRS but not under US GAAP. Goodwill is tested under ASC 350 by comparing the reporting unit's fair value with its carrying amount. Climate assumptions still need to be reasonable and consistent with the company's other reporting. See IAS 36 vs US GAAP impairment.

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