Impairment Assessment of Property, Plant, and Equipment (PPE): Key Considerations and Valuation Challenges

Impairment Assessment of PPE: Key Considerations and Valuation Challenges

In an evolving economic landscape marked by rising interest rates, technological disruption (such as AI), and shifts in consumer behavior post-COVID, many companies face declining demand and underutilized

When impairment indicators arise—such as low utilization, declining profitability, or structural market changes—companies must assess whether the carrying amount of PPE exceeds its recoverable amount, defined as the higher of:

1. Value in Use (VIU) – The present value of future cash flows generated by the asset.
2. Fair Value Less Costs of Disposal (FVLCD) – The estimated market price minus selling expenses.

While VIU often dominates impairment assessments, FVLCD is sometimes overlooked, particularly when income-based approaches yield negligible values. This article explores why a market-based approach is critical in such scenarios and how Valtech Valuation can support robust impairment testing.

Challenges in Impairment Testing for PPE

1. Limitations of the Income Approach (Value in Use)

When an asset generates minimal or negative cash flows, the VIU calculation may suggest near-full impairment. However, this does not always reflect economic reality. For example:

• A manufacturing plant may operate at a loss, but its liquidation value (via sale) could still be significant.
• Specialized machinery may have scrap or secondary market value, even if its current usage is unprofitable.
• The CGU can still have market value as a business unit.

Relying solely on VIU can lead to over-impairment, misrepresenting the asset’s true recoverable amount.

2. Why Fair Value Less Costs of Disposal (FVLCD) Matters

IAS 36 requires considering both VIU and FVLCD. If an asset’s FVLCD exceeds its VIU, impairment may be lower than initially estimated.

Key Issues in Estimating FVLCD:

• Market Illiquidity: Used machinery and equipment are often thinly traded, making pricing difficult.
• Cost to Sell: Expenses such as brokerage fees, dismantling, and transport must be deducted.
• Valuation Methodology: The cost approach (replacement cost less depreciation) is sometimes rejected by auditors, leaving the market approach as the most reliable alternative.

How Valtech Valuation Supports Impairment Testing

1. Market Approach for Fair Value Estimation

Our team leverages multiple data sources to determine realistic secondary market prices for used equipment, including:

• Dealer listings and private sales
• Expert appraisals for unique or customized machinery

2. Adjustments for Costs of Disposal

We ensure FVLCD reflects net realizable value by accounting for:

• Brokerage/agency fees
• Transport and dismantling costs

3. Bridging the Gap Between VIU and FVLCD

When VIU suggests near-zero recoverability, our market-based valuation provides a defensible alternative, ensuring compliance with IAS 36 while avoiding excessive impairment charges.

Conclusion

In today’s volatile economic environment, companies must carefully assess PPE impairment using both VIU and FVLCD. While income-based approaches may indicate steep write-downs, a well-supported market valuation can reveal hidden recoverable value, ensuring financial statements reflect true economic conditions.

Valtech Valuation specializes in defensible impairment assessments designed for financial reporting purpose, combining market intelligence, industry expertise, and rigorous methodology to support accurate financial reporting.

Contact us today to discuss how we can assist in your next impairment review.