Quick Answer: How to Reverse an Impairment Loss
Under IFRS (IAS 36), an impairment loss recognized in a prior period must be reversed if there has been a change in the estimates used to determine the asset's recoverable amount. The reversal is limited to the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized. The journal entry is:
Dr. Accumulated Impairment Loss $XX,XXX
Cr. Impairment Reversal Gain (P&L) $XX,XXX
Note: Under US GAAP (ASC 360), impairment reversals are prohibited for long-lived assets held for use. This is one of the most significant differences between IFRS and US GAAP.
What Is an Impairment Reversal?
An impairment reversal occurs when a previously impaired asset recovers part or all of its value. When a company originally recorded an impairment loss — writing down an asset because its carrying amount exceeded its recoverable amount — that write-down may later prove to be excessive if market conditions improve, cash flow projections brighten, or the asset's fair value increases.
Under IAS 36 Impairment of Assets, entities are required to assess at each reporting date whether there is any indication that an impairment loss recognized in prior periods may no longer exist or may have decreased. If such indicators exist, the entity must re-estimate the recoverable amount and, if appropriate, reverse the impairment.
IFRS vs. US GAAP: The Critical Difference
The treatment of impairment reversals is one of the most significant divergences between the two major accounting frameworks:
| Aspect | IFRS (IAS 36) | US GAAP (ASC 360) |
|---|---|---|
| Reversal permitted? | Yes, for all assets except goodwill | No, prohibited for assets held for use |
| Reversal trigger | Change in estimates since last impairment | N/A — no reversal allowed |
| Reversal cap | Carrying amount had no impairment occurred | N/A |
| Goodwill | Reversal prohibited (IAS 36.124) | Reversal prohibited (ASC 350-20) |
This difference means that IFRS-reporting entities may see their asset values and net income fluctuate more than US GAAP-reporting entities, particularly in cyclical industries. For more on the initial impairment recognition process, see our guide on journal entries for impairment loss.
Indicators That an Impairment Reversal May Be Warranted
IAS 36.111 requires entities to consider both external and internal sources of information when assessing whether a prior impairment should be reversed:
External Indicators
- The asset's market value has increased significantly during the period
- Significant favorable changes in the technological, market, economic, or legal environment
- Market interest rates or other market rates of return on investments have decreased, which will increase the asset's value in use
Internal Indicators
- Significant favorable changes in the extent or manner in which the asset is used
- Evidence from internal reporting that the economic performance of the asset is, or will be, better than expected
- A decision to restart or expand operations that had been curtailed when the impairment was recorded
How to Calculate the Impairment Reversal
The calculation of an impairment reversal involves comparing the asset's current recoverable amount against two benchmarks: its current carrying amount and its "ceiling" — the carrying amount that would exist had no impairment ever been recognized.
Step-by-Step Calculation
- Determine current recoverable amount — the higher of fair value less costs of disposal (FVLCD) and value in use (VIU).
- Calculate the ceiling — what the carrying amount would have been (net of accumulated depreciation) if no impairment had been recorded.
- Compare: if the recoverable amount exceeds the current carrying amount, a reversal is indicated, but capped at the ceiling.
Illustrative Example: Reversing an Impairment on Machinery
Scenario: Beta Manufacturing Inc. purchased production machinery on January 1, 2023 for $500,000 with a 10-year useful life and zero residual value (straight-line depreciation of $50,000 per year).
Year 1 (2023): After one year, the carrying amount was $450,000 ($500,000 - $50,000). Due to a market downturn, the recoverable amount fell to $300,000. Beta recognized an impairment loss of $150,000.
Dr. Impairment Loss (P&L) $150,000
Cr. Accumulated Impairment Loss $150,000
Carrying amount after impairment: $300,000
Remaining useful life: 9 years
Revised annual depreciation: $300,000 ÷ 9 = $33,333
Year 2 (2024): Depreciation of $33,333 was recorded. The carrying amount at December 31, 2024 is $266,667.
Year 3 (2025): Depreciation of $33,333 was recorded through December 31, 2025. The carrying amount is now $233,334. Market conditions have improved significantly, and the recoverable amount is now estimated at $350,000.
Original cost: $500,000
Accumulated depreciation (3 years × $50,000): ($150,000)
Ceiling: $350,000
Recoverable amount: $350,000
Current carrying amount: $233,334
Maximum reversal: $350,000 - $233,334 = $116,666 (capped at ceiling)
December 31, 2025 — Reverse impairment:
Dr. Accumulated Impairment Loss $116,666
Cr. Impairment Reversal Gain (P&L) $116,666
Carrying amount after reversal: $350,000
Remaining useful life: 7 years
Revised annual depreciation: $350,000 ÷ 7 = $50,000
Journal Entry Format for Impairment Reversal
The general journal entry structure for reversing an impairment loss is straightforward:
| Account | Debit | Credit |
|---|---|---|
| Accumulated Impairment Loss (contra-asset) | $XX,XXX | |
| Impairment Reversal Gain (income statement) | $XX,XXX |
The reversal increases the asset's carrying amount on the balance sheet and is recognized as income in the profit or loss statement. As a result, it directly improves reported earnings and key metrics such as return on assets (ROA). After the reversal, depreciation expense must be adjusted prospectively to reflect the revised carrying amount and remaining useful life — similar to what happens after an initial impairment. For a deeper understanding of depreciation mechanics, refer to our article on journal entries for depreciation.
Assets Subject to Impairment Reversal Under IFRS
Not all assets qualify for impairment reversal. Here is a summary:
| Asset Type | Reversal Permitted? | Standard |
|---|---|---|
| Property, Plant & Equipment (PP&E) | Yes | IAS 36 |
| Intangible assets with finite lives | Yes | IAS 36 |
| Right-of-use assets (leases) | Yes | IAS 36 |
| Investment property (cost model) | Yes | IAS 36 |
| Goodwill | No | IAS 36.124 |
| Intangible assets with indefinite lives | No | IAS 36 |
| Inventories | Yes (under IAS 2) | IAS 2 |
The prohibition on goodwill impairment reversal is absolute and applies under both IFRS and US GAAP. For more on this, see our guide on journal entries for goodwill impairment. Separately, inventory write-down reversals operate under a different standard (IAS 2) but follow a similar conceptual approach — the carrying amount cannot exceed the original cost.
Disclosure Requirements for Impairment Reversals
IAS 36.130 requires extensive disclosures when an impairment reversal is recognized, including:
- The amount of the reversal recognized in profit or loss
- The events and circumstances that led to the reversal
- The recoverable amount and whether it was based on FVLCD or VIU
- The discount rate(s) used if VIU was the basis
- The carrying amount of the asset (or CGU) after the reversal
- The line item(s) in the income statement where the reversal is included
The standard also requires entities to disclose the nature of any reversals that are material individually or in aggregate. These disclosures are critical for users of financial statements to understand the impact of management's estimates and judgments on reported earnings.
Common Pitfalls to Avoid
- Reversing above the ceiling: The reversal cannot push the carrying amount above what it would have been without impairment. This is one of the most common errors in practice.
- Forgetting to adjust depreciation prospectively: After a reversal, the asset's revised carrying amount must be depreciated over the remaining useful life. Failing to update the depreciation schedule overstates subsequent earnings.
- Applying reversal rules to US GAAP financial statements: Under US GAAP, impairment losses are permanent for long-lived assets held for use. Reversals are not permitted, and recording one would be a material error.
- Reversing goodwill impairment: IAS 36 explicitly prohibits the reversal of goodwill impairment losses — even when the cash-generating unit's performance improves dramatically.
- Assuming all fair value increases justify reversal: The increase must stem from a change in the estimates used to measure recoverable amount, not merely from the passage of time (unwinding of the discount).
Impact on Financial Statements and Ratios
An impairment reversal has a material impact on both the balance sheet and income statement:
- Balance sheet: The carrying amount of the asset (or CGU) increases, improving total asset values and equity.
- Income statement: The reversal is recognized as a gain, directly increasing net income for the period.
- Return on assets (ROA): Improves in the period of reversal but may decline in subsequent periods due to higher depreciation on the increased asset base.
- Debt covenants: Can help entities regain compliance with asset-based or earnings-based debt covenants, though auditors and regulators scrutinize reversals closely for potential earnings manipulation.
Because impairment reversals can have such a significant impact on reported financial performance, IFRS requires robust documentation of the indicators, estimates, and calculations that support management's decision to reverse a prior impairment. For a broader discussion of asset write-downs, disposals, and how they interact with different asset classes, see our overview of journal entries for asset disposal.
