Objective evidence of impairment

Learning objectives

• Identify the objective evidence of impairment of the net investment in an associate.L3
• Justify from the facts of a case that an impairment test is required.L3

Normative references

• IAS 28 §40After applying the equity method, including recognising losses under para. 38, the entity applies paras. 41A to 41C to determine whether there is any objective evidence that its net investment in the associate or joint venture is impaired.
• IAS 28 §41AThe net investment is impaired, and impairment losses are incurred, if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after its initial recognition (loss events) and that loss event has an impact on the estimated future cash flows from the net investment that can be reliably estimated; losses expected as a result of future events are not recognised. Objective evidence includes observable data about: significant financial difficulty of the investee; a breach of contract (default or delinquency in payments); a concession granted because of its financial difficulty; the probability that it will enter bankruptcy or other financial reorganisation; the disappearance of an active market for the net investment because of its financial difficulties.
• IAS 28 §41CIn addition to the events in para. 41A, objective evidence of impairment of the net investment in the equity instruments of the associate or joint venture includes information about significant changes with an adverse effect that have taken place in the technological, market, economic or legal environment of the investee and indicate that the cost of the investment may not be recovered, as well as a significant or prolonged decline in the fair value of the investment below its cost. Para. 41B specifies that the disappearance of an active market merely because the instruments are no longer publicly traded is not evidence of impairment, and that a downgrade of credit rating or a decline in fair value is not, of itself, such evidence.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• Under IAS 28, which statements about objective evidence of impairment of the net investment in an associate are correct? More than one answer is possible.L3
• Alba SA holds 35% of Brise SA, an associate accounted for under the equity method. Since the acquisition, a new law has banned Brise's main product, which has caused serious financial difficulties for it (facts of the case). What should be concluded for Alba's investment in Brise?L3
• Alba SA holds 40% of Brise SA, an associate. This year, Brise lost its main customer following a significant adverse change in its market, and it faces significant financial difficulty (facts of the case). In addition, its margin fell by one point for purely seasonal reasons, with no expected effect on its future cash flows. Write a short note that concludes on whether an impairment test is needed, distinguishing facts of the case, rule and professional judgement.L3