The plan the impairment test ignores
A company's transition plan, published in its sustainability statement, includes retrofitting carbon capture on a high-emitting plant. The board has not yet approved the spend. Can the plant's value in use count the retrofit and the carbon it will save?
Every heavy emitter now tells two stories about the same assets. The sustainability statement describes a transition plan: new kit, lower emissions, a carbon bill that falls over the decade. The financial statements carry those same assets at a figure that has to survive an impairment test. The two are prepared by different teams, often on different timetables, and read by the same investors.
The difficulty is that IAS 36 does not let value in use count everything the transition plan promises. It tests the asset as it stands. Carbon costs the plant will bear go in; the retrofit that would cut them, if the entity has not yet spent the money, stays out. So the more ambitious the plan, the wider the gap between the two documents can become. This post works out what the impairment model may include, what it may not, and how to explain the difference.
Why the issue arises
Value in use is the present value of the cash flows the entity expects to derive from an asset or cash-generating unit (IAS 36.30(a), IAS 36.31). The cash flow projections must rest on reasonable and supportable assumptions representing management's best estimate of the economic conditions over the asset's remaining useful life, with greater weight given to external evidence (IAS 36.33(a)). They are based on the most recent budgets approved by management, but must exclude cash flows from future restructurings and from improving or enhancing the asset's performance (IAS 36.33(b)).
IAS 36.44 states the rule directly. Cash flows are estimated for the asset in its current condition, and exclude flows expected to arise from a restructuring the entity is not yet committed to, or from improving or enhancing the asset's performance. IAS 36.45 adds that this covers both the outflows and the savings or benefits they would bring.
A climate transition plan is almost entirely made of the things IAS 36.44 excludes. It is a programme of future capital expenditure to change how the asset performs, and sometimes of closures and relocations that look like a restructuring. The sustainability standards, by contrast, want exactly that information: IFRS S2 requires disclosure of the entity's transition plan and its key assumptions (IFRS S2.14(a)(iv)), and of how it expects its financial position to change given its investment plans, "including plans the entity is not contractually committed to" (IFRS S2.16(c)(i)). ESRS E1-1 asks for the investments and funding that support the plan and how it is embedded in financial planning (ESRS E1.16(c), (h)).
So the sustainability statement is built on the plan, and the impairment test is built on the asset without it. The question is whether the second may borrow from the first.
What is clear
Carbon costs the asset will bear in its current condition belong in value in use. A kiln that must buy and surrender emission allowances will do so whether or not anyone builds a capture unit. Expected allowance prices, and the withdrawal of free allocation already set in law, are economic conditions under IAS 36.33(a), not part of a plan. In Ireland the EPA describes free allocation for goods covered by the carbon border adjustment mechanism, which include cement, reducing from 2026 and reaching zero in 2034.
A change in the legal or market environment, such as a higher expected carbon price, is an impairment indicator (IAS 36.12(b)). So is internal evidence that an asset's economic performance will be worse than expected (IAS 36.12(g)).
Outflows needed to maintain the asset's current level of economic benefits are included, such as replacing shorter-lived components (IAS 36.49).
A restructuring enters value in use only once the entity is committed to it, and IAS 37 sets the test for commitment (IAS 36.46–36.47). That requires a detailed formal plan and a valid expectation in those affected, created by starting to implement it or announcing its main features (IAS 37.72).
An enhancement enters later still. Until the entity incurs the outflows that improve or enhance the asset, the inflows they would generate are excluded (IAS 36.48).
Fair value less costs of disposal is different. It uses market participant assumptions (IFRS 13.22) and the asset's highest and best use, even if the entity intends a different use (IFRS 13.27, IFRS 13.29). Value in use may reflect entity-specific factors, but fair value may not (IAS 36.53A).
What IFRIC and the IASB have said
No IFRIC agenda decision answers this question. The nearest is the April 2024 agenda decision Climate-related Commitments (IAS 37). The Committee concluded that stating a climate commitment does not create a present obligation for the cost of reducing future emissions, because those are costs of operating in the future. It added that the actions an entity plans to take could still affect how it measures other assets and what it discloses. That points towards IAS 36, but the agenda decision does not work it through.
The IASB's illustrative examples on disclosures about uncertainties, issued in November 2025, also stop short of the measurement question. They illustrate disclosures under IAS 1 and IFRS 18, IAS 36 and IAS 1.125, using climate-related fact patterns. None of them says a transition plan may enter value in use.
The one development that does touch the rule is still a proposal. In its March 2024 exposure draft on business combinations, goodwill and impairment, the IASB proposed removing the requirement to exclude restructuring and enhancement cash flows. The asset-in-its-current-condition requirement would stay, with a new paragraph allowing cash flows from the asset's "current potential" to be restructured or enhanced, if they meet the reasonable and supportable test in IAS 36.33. In April 2026 the IASB tentatively decided to keep that proposal, with nine of the 13 IASB members agreeing. As at October 2026 nothing has been issued, and redeliberations on the wider package continue. For a 31 December 2026 year-end, IAS 36.33(b) and IAS 36.44 apply as written.
The competing readings
Three readings are argued in practice.
Reading 1: the plan is management's best estimate. The board has endorsed the plan and published it. IAS 36.33(a) asks for management's best estimate of the future, and the plan is the best estimate. A forecast that assumes the kiln runs unchanged for a decade, paying an ever-rising carbon bill, describes a future no one at the company expects.
Reading 2: the retrofit is maintenance. Without carbon capture the plant cannot operate economically once free allocation is gone, so the spend is necessary to maintain its economic benefits and falls under IAS 36.49, not IAS 36.44(b).
Reading 3: the asset as it stands. Value in use includes every carbon cost the kiln will bear in its current condition and excludes the retrofit's spend and savings until the entity incurs them. The plan's financial effects are disclosed, not measured. If the plan's value is real to a buyer, it can be captured through fair value less costs of disposal, but only on market participant assumptions.
Why readings 1 and 2 fail
Reading 1 reads IAS 36.33(a) in isolation. The paragraph that asks for a best estimate is followed at once by one that excludes enhancement cash flows from that estimate (IAS 36.33(b)), and IAS 36.44 repeats the exclusion as a rule. A best estimate of what the entity will do is not the measurement objective; a best estimate of what the asset in its current condition will earn is. Publishing the plan does not change that. A transition plan is a statement of intent about future operations. IFRIC reached a parallel conclusion under IAS 37: stating a commitment does not create a present obligation for the costs of operating differently in future. Nothing in IAS 36 makes a public statement a substitute for spending the money.
Reading 2 is more persuasive, and it is wrong for a different reason. IAS 36.49 covers outflows that maintain the level of economic benefits "in its current condition": the routine replacement of parts that wear out. Carbon capture does not restore anything that has worn out. It adds a capability the kiln has never had, and changes its cost base for the rest of its life. Nor does anything in the EU Emissions Trading System legally require capture: the kiln can keep operating by buying allowances, which is exactly what the current-condition cash flows assume. Calling it maintenance because the current condition has become uneconomic is circular. The fall in the kiln's economics is precisely what the impairment test exists to capture.
Reading 3 is the one the standard requires. It is not comfortable. It produces a lower value in use than management's own forecast, for an asset management is planning to invest in. But that is the design. IAS 36 asks whether the money already sunk in the asset will come back from the asset as it is. The retrofit is a new investment decision with its own return, and it will be tested when it is made.
Two qualifications keep reading 3 honest. First, it cuts both ways: a transition plan that brings forward the closure of a plant is not an enhancement, and a shorter expected life goes straight into value in use and depreciation (IAS 16.51, IAS 16.56). Secondly, the exclusion applies only to value in use. If market participants would pay for the asset's potential to be retrofitted, fair value less costs of disposal may reflect it. They would also bear its cost, its execution risk and its dependencies, and the entity must adjust its own data where market participants would use different data (IFRS 13.89).
Worked example: Barrow Valley Cement plc
Barrow Valley Cement plc is an Irish cement group listed on Euronext Dublin, with a 31 December year-end. It has more than 1,000 employees and net turnover above €450m, so it remains within the CSRD's scope and publishes an ESRS sustainability statement in its management report.
One of its cash-generating units is the Ballyduff kiln line. At 31 December 2026 the unit's carrying amount is €260.0m, all property, plant and equipment, with no goodwill. It is depreciated to the end of 2036, the end of the kiln's remaining useful life in its current condition.
In September 2026 the board endorsed a transition plan, published in the 2026 sustainability statement. Its centrepiece is a carbon-capture retrofit at Ballyduff: €60.0m of capital expenditure in each of 2029 and 2030, cutting the unit's carbon cost by €45.0m a year from 2031, with €5.0m a year of running costs. At the year-end no investment decision has been taken, no contracts have been let, funding is not in place, and the plan depends on access to a CO2 transport and storage network that is not yet available to the company.
The unit's cash flows, before tax and financing, are forecast as follows. Operating cash flow before carbon is €80.0m a year. In its current condition, the net carbon cost after free allocation is €30.0m a year in 2027–2030 and €60.0m a year in 2031–2036, as free allowances run down and the expected allowance price rises. The pre-tax discount rate is 8%. Management's forecasts cover the kiln's remaining ten-year life, which IAS 36.33(b) permits where justified; for a single-asset plant with a fixed life and a legislated carbon schedule, it is. No disposal value is expected.
Current condition: €50.0m a year in 2027–2030 (€80.0m − €30.0m) and €20.0m a year in 2031–2036 (€80.0m − €60.0m).
With the plan: €50.0m a year in 2027–2028; −€10.0m in each of 2029 and 2030 (€50.0m − €60.0m of capex); and €60.0m a year in 2031–2036 (€80.0m − €15.0m of carbon − €5.0m of running costs).
The discount factors at 8% sum to 1.7833 for 2027–2028, 1.5289 for 2029–2030 and 3.3980 for 2031–2036.
€m, present value | Current condition | With the plan |
|---|---|---|
2027–2028 | 89.2 | 89.2 |
2029–2030 | 76.4 | (15.3) |
2031–2036 | 68.0 | 203.9 |
Value in use | 233.6 | 277.8 |
Carrying amount | (260.0) | (260.0) |
Impairment / headroom | (26.4) | 17.8 |
The arithmetic: in the current condition, €50.0m × 1.7833 = €89.2m, €50.0m × 1.5289 = €76.4m and €20.0m × 3.3980 = €68.0m, a total of €233.6m. With the plan, €50.0m × 1.7833 = €89.2m, −€10.0m × 1.5289 = −€15.3m and €60.0m × 3.3980 = €203.9m, a total of €277.8m. Undiscounted, the plan adds €120.0m net to the unit's cash flows (€270.0m of carbon savings, less €120.0m of capex and €30.0m of running costs), and €44.2m in present value terms.
With the plan, the unit passes with €17.8m of headroom. Without it, the unit fails by €26.4m. The retrofit is an enhancement under IAS 36.44(b), not yet incurred (IAS 36.48), so the right-hand column is not a permitted value in use.
Barrow Valley also estimates fair value less costs of disposal, a Level 3 measurement, at €225.0m. A buyer would credit the site's retrofit potential, but would also price in the capital needed, the execution risk and the unresolved storage dependency. Recoverable amount is therefore the higher figure, value in use of €233.6m (IAS 36.18).
Barrow Valley recognises an impairment loss of €26.4m in profit or loss (IAS 36.59, IAS 36.60), allocated pro rata across the unit's assets (IAS 36.104(b)). The unit's carrying amount falls to €233.6m, and depreciation from 2027 is based on that amount over the remaining ten years (IAS 36.63).
The estimate is sensitive. If the net carbon cost in 2031–2036 were €5.0m a year higher, value in use would fall by €5.0m × 3.3980 = €17.0m. That kind of figure is what the estimation uncertainty disclosure should give (IAS 1.125).
What to do
Separate the plan from the asset. For each high-emitting unit, split the board's forecast into three layers: the asset as it stands, including all carbon costs; committed restructuring; and uncommitted enhancements. Only the first two go into value in use.
Price carbon from external evidence. Use the same allowance price path and free allocation schedule across the impairment model, the sustainability statement and any internal carbon price disclosure (IFRS S2.29(f), ESRS E1-8), and give greater weight to external sources (IAS 36.33(a)).
Check the useful life against the plan. If the plan says a plant closes in 2032 unless it is retrofitted, the useful life in the fixed asset register should not run to 2040 (IAS 16.51).
Consider fair value less costs of disposal where a plan has real value to a buyer, built on market participant assumptions and documented as such.
Disclose the difference, rather than letting the reader find it. Under IAS 36.130 an impairment loss brings the events and circumstances, the recoverable amount and the discount rate. Where the unit carries significant goodwill, IAS 36.134 adds key assumptions, such as carbon prices, and sensitivity. Where neither applies, IAS 1.125 may still require the assumptions and their sensitivity, and IAS 1.31 may require an explanation of why a significant transition plan has had no effect on the numbers.
Explain the difference on the sustainability side too. IFRS S1.23 requires data and assumptions consistent with the financial statements to the extent the accounting standards allow, and IFRS S1.B42(c) requires disclosure of significant differences. ESRS 1.90 and 1.127 (in the 2023 set) carry the same principle and require inconsistencies to be explained, and ESRS E1 AR 78 names impairment carbon prices specifically. A sentence that says the impairment test excludes the retrofit because IAS 36 requires it is worth more than two documents that silently disagree.
Smaller questions
Does approving the investment change the answer? Not by itself. An enhancement's inflows enter value in use only once its outflows are incurred (IAS 36.48), which is a later point than board approval. A committed restructuring is different: its savings enter from the date of commitment (IAS 36.47). Classifying each element of the plan as one or the other therefore matters.
When the retrofit is built, can the 2026 impairment be reversed? Yes, potentially. Once the retrofit spend is incurred, value in use includes its benefits (IAS 36.48), and IAS 36's own Illustrative Example 6 shows the earlier impairment being reversed in exactly this situation. Costs incurred to enhance an asset's performance are a listed indicator of reversal (IAS 36.111(d)), and a reversal requires a change in the estimates used to determine recoverable amount (IAS 36.114). The reversal is capped, asset by asset, at the carrying amount the asset would have had without the impairment (IAS 36.117), while the retrofit itself is capitalised at cost.
Is a published transition plan a provision? Generally not. The April 2024 agenda decision Climate-related Commitments (IAS 37) concluded that a commitment to reduce future emissions is not a present obligation, and that an obligation to offset arises only as the emissions occur.
What if the plan brings forward a closure? Then it shortens the useful life and the value in use horizon, and may itself be an impairment indicator (IAS 36.12(f)). Retirements are not enhancements, so nothing excludes them.
What if the IASB's amendment is issued? It would remove the explicit exclusion but keep the current-condition requirement, adding the "current potential" test. An uncommitted, unfunded retrofit that depends on infrastructure the company cannot yet access would still have to pass the reasonable and supportable test in IAS 36.33(a). Entities should not anticipate an amendment that has not been issued.
Why it matters for the 2026 year-end
By the 2026 annual report, a large Irish issuer will be in its third year of placing an ESRS transition plan beside its audited impairment notes, and enforcers now expect the two to connect. ESMA's 2026 enforcement priorities focus the sustainability review on ESRS E1 (alongside S1), and on connectivity between the sustainability statement and the rest of the annual financial report. Its restructuring priority asks issuers to consider whether a restructuring affects IAS 36. ESMA's 2023 report on climate in financial statements went further, asking issuers that include climate capital expenditure in value in use to explain how that squares with the restructuring and enhancement exclusion.
Enforcers will read both documents together. An impairment note that says carbon has no effect, next to a plan that calls the same plant uneconomic without a €120m retrofit, invites a question. So does the reverse.
What the auditor will look at
The bridge between the board's transition plan forecast and the impairment model, line by line, with each excluded item identified as an uncommitted restructuring or an enhancement.
Evidence of commitment for anything included: IAS 37.72 evidence for restructurings, and incurred spend for enhancements.
The carbon price path and free allocation assumptions, compared with external forecasts and with the prices used in the sustainability statement and internal carbon pricing.
Useful lives and residual values compared with retirement dates in the plan.
Any fair value less costs of disposal: whether it uses market participant assumptions and adjusts the entity's own forecast where it must.
The disclosures: IAS 36.130 and IAS 36.134 where they apply, IAS 1.125 sensitivities, and whether the sustainability statement explains significant differences in assumptions.
Consistency across the whole annual report, which ISA 720 requires the auditor to read for material inconsistencies with the financial statements.
Work it through with our tools
The IAS 36 module in our Learning Hub covers value in use, cash-generating units and reversals, with practice questions. Use it to rehearse how the current-condition rule shapes the cash flows before you build the model.
Whether a plan element is a restructuring or an enhancement, and whether an uncommitted plan belongs in the numbers, is the kind of judgement that needs a clear write-up. The Tipping Point helps you weigh the factors and record the conclusion. Then run the notes through Disclosure Review to check the IAS 36 and estimation uncertainty disclosures.
IAS 16 in the Learning Hub: useful lives and residual values, and when to revise them.
IAS 37 in the Learning Hub: restructuring provisions and when an entity is committed.
IFRS 13 in the Learning Hub: market participant assumptions and highest and best use.
Disclosure Review: check your 2026 notes against the requirements.
A transition plan is a promise about the future, and the impairment test is a measurement of the present. IAS 36 does not let the promise prop up the measurement, and for 2026 the proposed amendment does not change that. The answer is not to make the two documents agree on the numbers. It is to make each one explain why the other's numbers differ.
Barrow Valley Cement plc and its Ballyduff works are fictional. Figures are in euro. References are to IFRS Accounting Standards as issued by the IASB, to IFRS Sustainability Disclosure Standards and to ESRS as adopted by Commission Delegated Regulation (EU) 2023/2772. An entity applying the simplified ESRS of Delegated Regulation (EU) 2026/1563 early for 2026 will find the ESRS paragraph numbers changed.
