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
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
For net investment in associates accounted for bythe equity method:
A significant or prolonged decline the fair value of the
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
Changes in the level of demand for goods or services sold by
the investee resulting from changing consumer tastes or product
Changes in the political or legal environment affecting the
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
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
It becomes probable the investee will enter into
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 expected to be generatedby the
associate and proceeds on disposal,or (b) the present value of
estimatedfuture cash flows expected to arise fromdividends to be
received and proceeds ondisposal. Any impairment loss is
recognizedby writing down the investment. Thewrite down is not
allocated to any asset,including goodwill, which forms part of
theinvestment.Net investments classified as held forsale or
distribution to its owners shouldbe measured at the lower of its
carryingamount at the classification date and its fairvalue less
costs to sell.
4. If objective evidence of impairment exists for a
trade receivable, loan or other financial interest in an associate
that is not a net investment, recognize and measure the loss in
accordance with IAS 39. IAS 39 requires recognitionof a
loss for such interests wheneverobjective evidence of impairment
exists.The measurement of the loss will varyaccording to the
classification of theinstrument. For assets carried at
amortizedcost (e.g. loans and receivables), the losswill be the
difference between the carryingamount of the asset and the present
valueof estimated future cash flows discountedat the asset's
original effective interest rate.For assets classified as available
for sale,the loss should be measured based on thefair value of the
5. Assess whether impairment determinations qualify as
critical accounting judgments or estimates for which disclosure is
necessary under paragraphs 122 and 125 of IAS 1,Presentation of
If so, disclosure aboutthe basis for the judgments and
otherinformation such as sensitivity analysis isnecessary.
1 This memorandum does not address recognition of
impairment in the associate's underlying long-lived assets and
the impact of such impairment losses on the application of the
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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