Two everyday IFRS judgements depend quietly on the quality of your cost allocation: impairment testing under IAS 36, and the net realisable value test for inventory under IAS 2. Both compare a carrying amount to a recoverable or realisable amount, and both fall apart if the cost feeding them is wrong.
IAS 36 and the cash-generating unit
IAS 36 says an asset must not be carried at more than its recoverable amount. Where an asset does not generate cash flows on its own, it is tested as part of a cash-generating unit, the smallest group of assets producing largely independent cash inflows. The recoverable amount of that CGU depends on its expected cash flows, and those cash flows depend on the cost attributed to the unit. Allocate cost crudely and you can impair the wrong unit, or miss an impairment that is genuinely there.
IAS 2 and net realisable value
Inventory is carried at the lower of cost and net realisable value. NRV is the estimated selling price less the costs to complete and sell. If the cost to complete and the cost to sell are estimated from blunt overhead rates, the NRV is unreliable, and so is the write-down, or the absence of one.
Why TDABC strengthens both tests
A Time-Driven Activity-Based Costing model attributes cost to the activity, the product and the unit that consumed it. That gives a defensible cost base for a CGU’s cash flows and a defensible cost-to-complete and cost-to-sell for NRV. When the auditor probes the assumptions behind an impairment or a write-down, the answer is traceable rather than asserted.
We are not your auditor and we do not perform impairment reviews. We build the cost model the judgement rests on. See how IFRS and the cost model fit together or the margin cascade.