Impairment Of Investments In Associates: Key Reminders For Year End


Existing economic conditions and uncertainty increase the risk of investors having to recognize an impairment loss for interests held in associates and joint ventures accounted for by the equity method. In this memorandum, we provide key reminders for complying with requirements in IAS 28, Investments in Associates, at year end.1

  1. Apply IAS 39, Financial Instruments: Recognition and Measurement, toidentify whether an interest in anassociate is impaired. The impairmentguidance in IAS 39 applies not only to netinvestments in associates, such as equityinvestments, but also to any loans, tradereceivables and other financial assets in theassociate the investor might hold and accountfor separately.

  2. Consider whether objective evidence of impairment exists. Examples of such evidence include the following:

    For net investment in associates accounted for by the equity method:

    A significant or prolonged decline the fair value of the interest. Significant adverse changes in the technological, market, economic, or legal environment in which the investee operates. Structural changes in the industry in which the investee operates. Changes in the level of demand for goods or services sold by the investee resulting from changing consumer tastes or product obsolescence. Changes in the political or legal environment affecting the investee's business. Changes in the investee's financial condition. For other interests (e.g. loans or receivables) not part of the net investment:

    Significant financial difficulty of the investee. The investee's liquidity. Solvency, business or other financial risk exposures. Levels of and trends in delinquencies for similar financial assets. National and local economic trends and conditions. The fair value of collateral and guarantees. Default or other breaches of covenants. Granting of concessions due to investee's financial condition. It becomes probable the investee will enter into bankruptcy. 3. Assess net investments not classified as held for sale or distribution to owners for impairment by comparing the carrying amount to its recoverable amount. If recoverable amount is lower, recognize a loss for the difference. The recoverable amount ofnet investment is the higher of its valuein use and fair value less cost to sell,determined in accordance with IAS 36,Impairment of Assets. In determining valuein use, an entity estimates either: (a) itsshare of the present value of the estimatedfuture cash flows...

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