How to Perform an IAS 36 Impairment Test on a Producing Field CGU and Record the Impairment Charge
Testing and recording an impairment charge when the recoverable amount of a producing field falls below its book value.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Impairment Loss — Oil & Gas Properties | Expense (+) | 150,000,000.00 | - |
| Oil & Gas Properties (Net Book Value) | Asset (-) | - | 150,000,000.00 |
💡 Accountant's Note
Under IAS 36, each producing field is a Cash Generating Unit (CGU). When oil prices fall or reserves are revised down, the recoverable amount (higher of VIU and FVLCTS) may fall below the carrying amount, triggering impairment.
Practitioner & Systems Framework
💻 ERP Architecture
Each producing field (or group of fields sharing common infrastructure) is typically a separate CGU for IAS 36 purposes. The recoverable amount is the higher of: (a) Value in Use (VIU) — PV of future cash flows from the field using management's best estimates of production, costs, and a pre-tax discount rate; or (b) Fair Value Less Costs to Sell (FVLCTS) — the price a market participant would pay, typically estimated using a DCF or comparable transaction multiples. Oil price assumptions are the most sensitive input — use a long-term real price deck consistent with market practice (typically based on analyst consensus or management's own long-term view).
⚠️ Audit Flags
Oil and gas impairment is audited intensively because: (a) the impairment amounts can be in the billions, (b) the oil price assumption has a huge impact on the outcome, and (c) management has incentives to avoid impairment (which reduces reported profit). Auditors will independently model the VIU calculation and challenge the oil price deck, production profile, cost assumptions, and discount rate. A significant fall in oil prices below the carrying value's implied break-even price is an automatic impairment indicator.
📄 Required Documentation
IAS 36 impairment model (CGU definition, production profile, oil price deck, cost assumptions, discount rate, VIU and FVLCTS calculations), CPR confirming proved developed and proved undeveloped reserves used in the model, oil price deck source (analyst consensus, management view), sensitivity analysis (showing impairment at different oil prices), auditor-reviewed discount rate calculation (WACC adjusted for petroleum risk), and Board or Audit Committee presentation on the impairment.
Automate this entry with the JEH Accounting Suite
Stop doing manual entry. Our VBA-powered ERP automatically generates your ledgers, Trial Balance, and Financial Statements.
No Subscriptions. Own your data.
Expert Analysis by Qusai Ahmad
General Accountant Supervisor & IFRS Specialist
Specialized in SAP GUI automation and Middle Eastern tax compliance. Building digital tools for the next generation of finance leaders.
Related Journal Entries
Oil & Gas
How to Capitalize the Cost of a 3D Seismic Survey as an Exploration and Evaluation Asset Under IFRS 6
Oil & Gas
How to Capitalize Exploratory Drilling Costs as an E&E Asset Pending Reserve Determination
Oil & Gas