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# IFRS 36 Impairment Testing in Crisis: How to Adjust Your Models When Geopolitical Risk Becomes Material

**Date:** June 7, 2026 | **Author:** FSH Financial Consultants | **Read Time:** 12 minutes | **Category:** IFRS & Accounting Standards

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## The Crisis Nobody’s Modeling Yet

It’s June 2026. Your company has invested AED 50 million in a hospitality asset in Dubai. Your supply chain depends on port logistics through Jebel Ali and suppliers in Sharjah. You have receivables from related entities in conflict-adjacent regions.

When you built your impairment model for this asset two years ago, you assumed a 6% discount rate and 3% perpetual revenue growth. Your cash conversion cycle was 45 days. Your terminal growth rate was locked in.

Today, geopolitical tensions have pushed up your cost of capital. Shipping times have doubled. Customer demand in tourism has softened. Your assumptions — the ones embedded in IAS 36 impairment tests — are no longer representative.

Here’s the problem: **most UAE entities haven’t updated their impairment models yet.**

Your Q2 2026 financial statements don’t reflect this. Your Q4 2026 year-end statements will have to. But what do you actually change? How much adjustment is material? What disclosures does IFRS 36 require when you’re modeling uncertainty?

This is where most CFOs and auditors get stuck.

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## What IFRS 36 Actually Says (And What It Doesn’t)

**IAS 36 — Impairment of Assets** is the IFRS standard that governs when and how you test an asset for impairment. It applies to:
– Goodwill (annual test, mandatory)
– Intangible assets with indefinite useful lives (annual test, mandatory)
– All other assets (when indicators of impairment exist)

The test works like this:

**Step 1: Trigger Assessment**

You must perform an impairment test if:
– External indicators suggest impairment (market downturn, legal changes, asset obsolescence)
– Internal indicators suggest impairment (underperformance vs. budget, planned abandonment, restructuring)

Paragraph 12 of IAS 36 lists 19 specific indicators. Here’s what matters for geopolitical crisis:

> *”External sources of information: … a significant decline in asset’s market value … a significant adverse change in the technological, market, economic or legal environment in which the entity operates”*

**Geopolitical crisis? That’s a trigger.** You must test.

**Step 2: Recoverable Amount Calculation**

The recoverable amount is the *higher* of:
1. **Fair value less costs to sell** (what someone would pay for the asset)
2. **Value in use** (present value of future cash flows)

Most entities use Value in Use (VIU) because:
– Fair value data is scarce for specialized assets
– VIU captures entity-specific assumptions
– It’s defensible in audit

VIU formula:
“`
VIU = Σ [Estimated cash flows / (1 + discount rate)^t] + [Terminal value / (1 + discount rate)^n]
“`

**Step 3: Comparison**

If Recoverable Amount < Carrying Amount → Impairment loss = Carrying Amount - Recoverable Amount --- ## Where Geopolitical Risk Hits Your Model (Three Pressure Points) ### **Pressure Point 1: Discount Rate (WACC)** Your discount rate captures the time value of money and risk. **Before crisis:** You used a WACC of 6% based on: - Risk-free rate: 3.5% (UAE 5-year government bonds) - Equity risk premium: 4.5% - Beta: 1.2 (asset-specific risk) - Cost of debt: 5.2% - Debt/Equity: 30% **After crisis:** What changes? 1. **Risk-free rate stays the same** (government backed) 2. **Equity risk premium might increase** (regional economic uncertainty) 3. **Beta increases** (your specific business is more risky) 4. **Cost of debt increases** (lenders want higher spreads) A credible geopolitical adjustment might be: - Risk-free rate: 3.5% → 3.5% (no change) - Equity risk premium: 4.5% → 5.5% (+100 bps for regional uncertainty) - Beta: 1.2 → 1.5 (+0.3 for hospitality/tourism exposure) - Cost of debt: 5.2% → 6.2% (+100 bps credit spread) **Result:** Your WACC rises from 6.0% → 7.1% That 110 bps increase has a **massive** impact on VIU: For an asset generating AED 10 million/year in perpetuity: - At 6% discount rate: VIU = AED 10M / 0.06 = **AED 167 million** - At 7.1% discount rate: VIU = AED 10M / 0.071 = **AED 141 million** **Impairment loss: AED 26 million.** Just from the discount rate. **IAS 36 Requirement:** Paragraph 55 requires disclosure of the discount rate and sensitivity analysis. You must disclose *why* it changed. ### **Pressure Point 2: Cash Flow Assumptions** Your model assumes revenue growth, cost inflation, and working capital trends based on historical performance. Geopolitical crisis forces you to reassess: **Revenue growth:** - Tourism/hospitality → demand compression (expect -10% to -20% year 1) - Import-dependent manufacturing → supply chain delays, cost inflation - Regional trade → diversion of logistics routes adds 2-3 weeks delivery time **Cost structure:** - Freight costs: up 30-40% due to rerouted logistics - Working capital: cash conversion cycle extends (customers stretch payments, suppliers demand deposits) - Labor: higher turnover in tourism, rising wage pressure due to skill gaps **Example — 5-year hospitality cash flow:** | Year | Before Crisis Assumption | After Crisis Adjustment | Change | |------|--------------------------|-------------------------|--------| | Y1 | AED 15M (base) | AED 12M (-20% demand) | -3M | | Y2 | AED 15.5M (+3.3% growth) | AED 11.8M (-1.7% growth)| -3.7M | | Y3 | AED 16M (+3.2% growth) | AED 12.2M (+3.4% growth)| -3.8M | | Y4 | AED 16.5M (+3.1% growth) | AED 12.9M (+5.7% growth)| -3.6M | | Y5 | AED 17M (+3.0% growth) | AED 13.7M (+6.2% growth)| -3.3M | | **Terminal** | **AED 17.5M / 0.06 = AED 292M** | **AED 14.5M / 0.071 = AED 204M** | **-AED 88M** | **Total VIU impact:** Roughly -AED 100 million (combining discount rate and cash flow effects). **IAS 36 Requirement:** Paragraph 130(f) requires you to disclose the assumptions and judgments used, especially for cash flow forecasts. You must explain *why* you adjusted them. ### **Pressure Point 3: Terminal Growth Rate & Perpetuity Assumption** Many entities assume a perpetual terminal growth rate (usually 2-3%, matching inflation). In crisis, you must question: *Will this asset return to its pre-crisis cash flow generation?* **Conservative approach:** Model a lower terminal growth rate or limit the projection period. | Assumption | Pre-Crisis | Post-Crisis Rationale | |------------|-----------|----------------------| | Terminal growth rate | 3.0% (long-term inflation) | 1.5% (cautious recovery, structural demand shift) | | Projection period | Infinite | 10 years, then exit value at lower multiples | This forces you to assume the asset doesn't fully recover, compounding impairment pressure. --- ## How IFRS 18 Changes the Disclosure Game (Effective Jan 1, 2027) **IFRS 18 — Presentation of Financial Statements** becomes effective January 1, 2027. It replaces IAS 1. Key changes for impairment disclosure: 1. **Mandatory "Operating Profit" subtotal** — impairment losses are reclassified as "operating" or "non-operating" based on nature. Geopolitical impairments are typically operating (part of asset management). 2. **Disaggregation of material items** — you must separately disclose material impairment losses, not buried in "depreciation and amortization." 3. **Enhanced key judgment disclosure** — IFRS 18 paragraph 114-119 require explicit disclosure of key judgments, including: - Determination of recoverable amount - Discount rate assumptions - Long-term growth rates - Management's views on potential reversal 4. **Sensitivity analysis** — IAS 36 requires sensitivity, but IFRS 18 makes it mandatory and more specific. **Translation:** By December 31, 2026, you must have updated your impairment models AND prepared your IFRS 18 transition disclosures. --- ## The IASB's November 2025 Guidance on Uncertainty Disclosure In November 2025, the IASB published **Examples Illustrating How an Entity Applies the Requirements in IFRS Accounting Standards to Report Uncertainties in Financial Statements**. This directly addresses the question: *How do I disclose an impairment test when I'm uncertain about key assumptions?* Key takeaway: **Entities must disclose the range of outcomes and the assumptions that drive variability.** Example from IASB guidance (adapted for UAE context): > **Goodwill Impairment — Geopolitical Uncertainty**
>
> *”The impairment test for goodwill allocated to the Hospitality Cash-Generating Unit (CGU) is sensitive to changes in the discount rate and terminal growth rate assumptions. Management assessed a range of scenarios reflecting geopolitical uncertainty:*
>
> – *Base case (50% probability): 6.5% discount rate, 2.0% terminal growth → VIU = AED 180M*
> – *Stress case (30% probability): 7.5% discount rate, 1.0% terminal growth → VIU = AED 150M*
> – *Severe case (20% probability): 8.5% discount rate, 0.5% terminal growth → VIU = AED 120M*
>
> *Impairment is recognized if VIU falls below the carrying amount of AED 175M. Under the base case, no impairment is recognized. However, if the discount rate increases to 7.2% or the terminal growth rate decreases to 1.5%, impairment would be recognized.*
>
> *Management’s view: The base case reflects the most likely outcome, assuming regional stability by Q4 2027. However, prolonged geopolitical tension could shift probabilities toward stress/severe cases, triggering impairment in future periods.”*

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## Real UAE Scenarios: How to Apply This

### **Scenario 1: Tourism Hospitality Company (AED 200M Asset Base)**

**Company Profile:**
– Owns 4-star hotel in Dubai Marina
– 85% revenue from regional tourists (GCC, Middle East)
– Financed with AED 120M debt (cost of debt: 5.5%)

**Pre-Crisis Model (Q4 2025):**
– Annual cash flows: AED 25M
– Discount rate (WACC): 6.0%
– Terminal growth: 3.0%
– VIU = AED 25M × annuity factor + terminal value = AED 320M
– Carrying amount: AED 200M → **No impairment**

**Post-Crisis Adjustment (Q2 2026):**

Geopolitical indicators:
– Regional tourist arrivals down 18% YoY (May 2026 data)
– Hotel occupancy rates in conflict-exposed markets (Egypt, Lebanon) collapsed
– Operating costs up 12% (labor, supplies)
– Financing cost increased to 6.2%

**Updated assumptions:**
– Annual cash flows: AED 20M (down 20% due to occupancy decline)
– Discount rate: 7.1% (up from 6.0%)
– Terminal growth: 1.5% (down from 3.0%, expects slower recovery)

**New VIU Calculation:**
“`
VIU = [20M / 1.071] + [20M / 1.071²] + … + [Terminal Value]
VIU = ~AED 210M (estimated, rough calculation)
“`

**Impairment Assessment:**
– Carrying amount: AED 200M
– Recoverable amount: AED 210M
– Impairment loss: AED 0 (No impairment, but marginal)

**BUT — Disclosure Required:**

Under IAS 36 and IFRS 18:

> *”The recoverable amount of the Hospitality CGU (consisting of our Dubai Marina property) is approximately AED 210 million, calculated using the Value in Use method. This impairment test is highly sensitive to assumptions regarding regional demand recovery and discount rate assumptions.*
>
> *Key assumptions:*
> – *Discount rate: 7.1% (increased from 6.0% prior year, reflecting elevated credit spread due to geopolitical uncertainty)*
> – *Terminal growth rate: 1.5% (reduced from 3.0%, reflecting cautious view on long-term tourism recovery)*
> – *Revenue assumptions: Based on scenario analysis incorporating 15-20% near-term demand contraction, with recovery to base case by Q4 2027*
>
> *Sensitivity: If the discount rate were to increase a further 50 basis points to 7.6%, the recoverable amount would fall to AED 195 million, resulting in an impairment loss of AED 5 million. If regional demand does not recover by Q4 2027 as projected, further impairment would be likely.*
>
> *Management assessment: Based on current market conditions and assuming regional stability by Q4 2027, no impairment is recognized in the current period. However, management continues to monitor regional demand indicators closely and will reassess in future periods if indicators deteriorate further.”*

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### **Scenario 2: Manufacturing Company with Supply Chain Exposure**

**Company Profile:**
– UAE-based automotive components manufacturer
– Key suppliers in conflict-adjacent regions (Turkey, Egypt, Jordan)
– Goodwill from 2021 acquisition: AED 45M

**The Issue:**
– Supply chain disruptions have forced rerouting to longer shipping routes
– Freight costs up 35% (was AED 2M/month, now AED 2.7M/month)
– Lead times extended from 30 days to 55 days
– Working capital requirements increased by AED 15M

**Impairment Assessment:**

Old model assumed:
– Perpetual EBITDA: AED 22M
– Discount rate: 5.8%
– VIU = AED 22M / 0.058 = AED 379M
– Goodwill allocated: AED 45M → absorbed in VIU, **No impairment**

New model reflects:
– Year 1-2 EBITDA: AED 18M (demand contraction + higher freight)
– Year 3+ EBITDA: AED 21M (efficiency gains, cost pass-through to customers)
– Discount rate: 6.8% (higher cost of debt, equity risk premium)
– VIU = ~AED 295M (estimated)

**Impairment loss:** AED 379M – AED 295M = **AED 84M potential impairment**

This is material. Likely requires disclosure and possibly P&L recognition.

**FSH’s Advice:**
1. **Document the supply chain impact** — get freight invoice increases, lead time documentation, customer feedback
2. **Model multiple scenarios** — base case (supply chain normalizes by Q4 2027), stress case (elevated freight persists longer)
3. **Update WACC** — use actual current cost of debt (likely 6.2-6.5%), adjust equity risk premium
4. **Test sensitivity** — what discount rate would trigger impairment? What revenue recovery timeline is implied?
5. **Disclose transparently** — if impairment is recognized, explain the geopolitical drivers clearly

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## FSH’s Practical Guidance: 5 Steps for Your Q4 2026 Statements

### **1. Audit Your Asset Register (Due: June 30, 2026)**

List all assets with:
– Carrying amount
– Current market conditions
– Indicators of impairment (demand changes, cost inflation, regulatory changes)
– Last impairment test date

Flag assets in sensitive sectors:
– Tourism, hospitality, aviation, logistics
– Import-dependent manufacturing
– Regional trade

### **2. Update Your WACC (Due: July 15, 2026)**

Current market data:
– UAE risk-free rate: Check 5-year government bond yields (currently ~3.5%)
– Equity risk premium: Consider OECD recession warning — add 50-100 bps to historical 4.5%
– Cost of debt: Obtain quotes from your bank or use Bloomberg
– Beta: Review industry comparables (use GCC listed companies)

**Formula:**
“`
WACC = [E/V × Cost of Equity] + [D/V × Cost of Debt × (1 – Tax Rate)]
“`

### **3. Revise Cash Flow Projections (Due: July 31, 2026)**

For each material asset/CGU:
– **Year 1 (2026):** Conservative forecast reflecting current headwinds
– **Years 2-5:** Scenario-based recovery (probability-weighted if material)
– **Terminal year:** Conservative growth (1.5-2.5%, not 3%+)

Use multiple scenarios:
– Base case (60%): Recovery by Q4 2027
– Stress case (30%): Recovery delayed to 2028
– Severe case (10%): Structural demand loss

### **4. Calculate VIU & Compare to Carrying Amount (Due: August 15, 2026)**

– Use updated WACC and cash flows
– Calculate base case, stress, and severe case VIU
– Identify assets at risk of impairment
– Document all assumptions in spreadsheet (for audit trail)

### **5. Prepare Disclosure (Due: September 15, 2026)**

For any asset with:
– Impairment loss recognized, OR
– Recoverable amount close to carrying amount, OR
– Significant assumption changes

Disclose:
– Description of asset/CGU
– Trigger for test
– Recoverable amount and method (VIU or fair value)
– Key assumptions (discount rate, terminal growth, revenue assumptions)
– Sensitivity analysis
– Management’s view on future recovery

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## Sample Disclosure Language (Adapt to Your Business)

“`
IMPAIRMENT TESTING — GEOPOLITICAL SENSITIVITY

The Group assessed impairment indicators for all significant assets in light of current geopolitical conditions in the Middle East. The following CGU was identified as sensitive to changes in regional demand and financing costs:

HOSPITALITY CASH-GENERATING UNIT

Description: 4-star hotel property in Dubai, representing 22% of property, plant and equipment

Trigger for assessment: Significant adverse change in market conditions (regional tourist arrivals declined 18% YoY; estimated demand recovery delayed 6-12 months vs. prior expectations)

Recoverable amount: AED 185 million (VIU method)

Carrying amount: AED 190 million

Impairment loss: AED 5 million recognized in Q2 2026

Key assumptions:
— Discount rate (WACC): 7.1% (prior year: 6.0%), reflecting increased cost of debt due to higher credit spreads
— Terminal growth rate: 1.5% (prior year: 3.0%), reflecting cautious view on long-term demand normalization
— Revenue assumptions: Year 1-2 revenues reduced 15-20% reflecting lower regional occupancy; recovery to 95% of pre-crisis levels assumed by end of 2027
— Cost structure: Operating costs modeled to increase 8% YoY through 2027, declining in 2028 as supply chain normalization occurs

Sensitivity analysis:
If the discount rate increases to 7.6% (additional 50 bps), the recoverable amount would decrease to AED 170 million, resulting in an additional impairment loss of AED 20 million.

If terminal growth rate decreases to 1.0%, the recoverable amount would decrease to AED 165 million, resulting in additional impairment of AED 25 million.

Management assessment: Impairment is recognized based on deterioration in near-term demand forecasts and elevated financing costs. However, management expects recovery towards historical demand levels by Q4 2027, assuming regional stability. The sensitivity of the recoverable amount to key assumptions indicates that adverse changes to regional demand or financing costs could result in further impairment in future periods.
“`

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## What Auditors Will Challenge

1. **Discount rate increases** — Be prepared to justify every basis point. Auditors will ask: “Why 7.1% and not 6.8%? Where’s your benchmark?”
2. **Terminal growth rate reduction** — Explain why you don’t expect full recovery. What structural changes support this?
3. **Cash flow adjustments** — Detail-level justification. Don’t just say “demand down 20%.” Show customer commentary, booking data, competitor intelligence.
4. **Scenario probability weighting** — If you’re using three scenarios, justify the 60/30/10 split. Auditors want consistency across assets.
5. **Comparability** — If you tested Asset A at 7.0% WACC and Asset B at 6.5% WACC, explain the difference.

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## Timeline to Action

| Due Date | Task |
|———-|——|
| **June 30, 2026** | Asset register audit + impairment trigger assessment |
| **July 15, 2026** | WACC update (final rate for FY2026 model) |
| **July 31, 2026** | Revised cash flow projections (3-scenario model) |
| **August 15, 2026** | VIU calculations + impairment identification |
| **September 1, 2026** | Auditor pre-meeting (discuss findings, agree approach) |
| **September 15, 2026** | Final disclosure drafting + Board approval |
| **October 31, 2026** | Audit completion target (Q4 year-end) |

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## The Bigger Picture: IFRS 18 Transition

Remember: Your Q4 2026 year-end statements will be the **first full year under IFRS 18** (effective Jan 1, 2027).

This means:
– Impairment losses will be separately presented on the income statement
– Your disclosure must be IFRS 18-compliant (not just IAS 36)
– Comparative figures (Q4 2025) must be recast under IFRS 18 structure

If you’re recognizing impairment in Q4 2026, prepare for **heightened disclosure scrutiny** and **investor questions** about forward guidance.

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## FSH’s Bottom Line

**Three things your CFO must do right now:**

1. **Update WACC to current market conditions.** A 100 bps increase in discount rate can swing multimillion-dinar impairment decisions.

2. **Reassess cash flow assumptions for realistic geopolitical recovery scenarios.** Don’t assume V-shaped recovery. Model L or U-shaped scenarios.

3. **Prepare transparent, detailed disclosures.** Auditors, investors, and analysts will scrutinize impairment assumptions in the current environment. Better to over-disclose than face audit challenges in Q4.

The UAE’s real estate and financial sectors remain resilient. But resilience doesn’t mean immunity. Companies that test their assumptions now and adjust transparently will navigate 2027 cleanly. Those that bury impairment risks in vague disclosures will face audit friction.

**Your move: Audit your assets this week.**

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**FSH Financial Consultants**
*Audit. Tax. Advisory.*
Email: info@fshconsultants.com | Phone: +971 55 678 53 51

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**Keywords:** IFRS 36, IAS 36, Impairment Testing, Geopolitical Risk, WACC, Cash Flow Assumptions, Terminal Growth, IFRS 18, Goodwill Impairment, Financial Statement Disclosure, UAE Corporate Tax, Financial Reporting, Valuation, CGU