flows because of transfer pricing and other intra-group transactions issues, described
in 12.1 above and 12.4.2 below.
12.4.2
VIU for investments in subsidiaries, associates and joint ventures
Unlike most other assets, an investment in a subsidiary, joint venture or associate can
be viewed as either:
• an individual asset that can generate income, e.g. in the form of dividends; or
• as an asset that represents the underlying assets and liabilities that are under the
control of the subsidiary, joint venture or the associate.
1532 Chapter 20
IAS 28 acknowledges this by stating:
‘In determining the value in use of the investment, an entity estimates:
(a) its share of the present value of the estimated future cash flows expected to
be generated by the associate or joint venture, including the cash flows from
the operations of the associate or joint venture and the proceeds on the
ultimate disposal of the investment; or
(b) the present value of the estimated future cash flows expected to arise from
dividends to be received from the investment and from its ultimate disposal.
Under appropriate assumptions, both methods give the same result.’ [IAS 28.42].
This means that there are broadly two approaches in testing for impairment: one focuses
on the investment and the cash flows the parent receives (dividends and ultimate
disposal proceeds) and the other considers the recoverable amount of the underlying
assets of the investment and the cash flows generated by these assets. These two
approaches are considered at 12.4.2.A and 12.4.2.B respectively. Whichever view is
taken, the entity needs to ensure that the cash flows are appropriate (see 12.1 above in
respect of considerations around intra-group transfer pricing).
It is important to note that, whether an entity calculates VIU using its share of present
value of estimated cash flows of the underlying assets or the dividends expected to be
received, it is necessary to adjust them to reflect IAS 36 restrictions, e.g. those in respect
of improvements and enhancements (see 7.1.2 above) and restructuring (see 7.1.3 above)
and as well as growth (see 7.1 and 7.1.1 above) and discount rates (see 7.2 above). A
practical challenge in practice may be to obtain sufficiently detailed information to
make such adjustments for investments in entities that are not controlled by the parent,
in which case the entity may have to use FVLCD to establish the recoverable amount.
12.4.2.A
VIU of investments in subsidiaries, associates and joint ventures using
dividend discount models
IAS 28 allows the VIU of the equity accounted interest to be based on the present value
of the estimated future cash flows expected to arise from dividends to be received from
the investment. This describes in broad terms what is also known as a dividend discount
model (DDM). DDMs are financial models frequently used by financial institutions that
value shares at the discounted value of future dividend payments. These models value
a company on the basis of future cash flows that may be distributed to the shareholders
in compliance with the capital requirements provided by law, discounted at a rate
expressing the cost of risk capital. By analogy this approach can be used to calculate the
VIU for investments in subsidiaries, associates and joint ventures carried at cost in the
separate financial statements of a parent and for equity accounted investments.
The Interpretations Committee considered the use of DDMs in testing for impairment
under IAS 36. The Interpretations Committee rejected ‘in general’ the use of DDMs as
an appropriate basis for calculating the VIU of a CGU in consolidated financial
statements.2 It was of the view that calculations using DDMs may be appropriate when
calculating the VIU of a single asset, for example when determining whether an
investment is impaired in the separate financial statements of an entity. It did not
consider whether the cash flows used in the DDMs should be adjusted to reflect IAS 36
Impairment of fixed assets and goodwill 1533
assumptions and restrictions, as discussed more fully under 12.4.2 above. However, in
order to use a DDM for calculating VIU, IAS 36’s requirements should be reflected in
the future dividends calculated for use in the model.
12.4.2.B
VIU of investments in subsidiaries, associates and joint ventures based on
cash flows generated by underlying assets
When testing investments in subsidiaries, associates and joint ventures based on cash
flows generated by underlying assets entities need to ensure that the cash flows are
appropriate (see 12.1 above in respect of intra-group transfer pricing) and that the
restrictions of IAS 36 are appropriately applied (see 12.4.2 above).
If an entity is testing its investments in subsidiaries, associates and joint ventures for
impairment and it can demonstrate that the investment contains one or more CGUs in
their entirety then it may in some circumstances be able to use the results of the group
impairment tests of the underlying CGUs to test the investment for impairment. If the
aggregate VIU (or FVLCD) of the CGU or CGUs is not less than the carrying value of the
investment, then the investment may not be impaired. Note that the entity’s investment
reflects the net assets of the subsidiary, associates or joint venture while the CGU
reflects the assets and liabilities on a gross basis, so appropriate adjustments will have
to be made.
It may not be so straightforward in practice. There are particular problems if the asset
(the investment) and the underlying CGU are not the same. CGUs may overlap
individual subsidiaries so, for example, a single CGU may contain more than one such
subsidiary. Even if the CGU and investment coincide, the shares may have been
acquired in a business combination. It is quite possible that the synergies that gave rise
to goodwill on acquisition are in another part of the group not controlled by the
intermediate parent in question. In such a case an entity might not be able to use the
result of the group impairment test and so would have to calculate the recoverable
amount of the investment.
12.4.3
Equity accounted investment and indicators of impairment
In connection with issuing IFRS 9, the IASB amended IAS 28 to include the impairment
indicators an entity needs to use to determine whether it is necessary to recognise any
additional impairment loss once it has accounted for losses, if any, under IAS 28.
[IAS 28.40-41A]. These impairment indicators are the same indicators as previously stated
in IAS 39 – Financial Instruments: Recognition and Measurement – for financial assets.
The indicators of impairment require ‘objective evidence of impairment as a result of
one or more events that have occurred after the initial recognition’. [IAS 28.41A].
However, one would not expect any significant difference in the impairment indicators
under IAS 36 and IAS 28 because both look for objective evidence, sometimes in
virtually identical terms and neither claims that its list of indicators is exclusive. [IAS 36.13,
IAS 28.41A]. This means that an impairment test should not be avoided because an
&nbs
p; impairment indicator is not mentioned specifically in IAS 28.
If an entity has reason to believe that the carrying amount of an investment in an
associate or joint venture is higher than the recoverable amount, this is most likely a
sufficient indicator on its own to require an impairment test.
1534 Chapter 20
12.4.4
Equity accounted investments and long term loans
Investors frequently make long-term loans to associates or joint ventures that,
from their perspective, form part of the net investment in the associate or joint
venture. Under previous IFRS guidance, it was not clear whether these should be
accounted for, in particular tested for impairment, as part of the net investment
under IAS 28 and IAS 36, or as stand-alone investments by applying the
requirements of IFRS 9.
After receiving a request related to the interaction between IFRS 9 and IAS 28 and
whether the measurement of long-term interests that form part of the net
investment in associates and joint ventures should be governed by IFRS 9, IAS 28 or
a combination of both, the IASB, in its October 2016 meeting, tentatively decided to
propose amendments to IAS 28 to clarify that an entity applies IFRS 9, in addition
to IAS 28, to long-term interests that form part of the net investment and to include
the proposed amendments in the next cycle of annual improvements (2015–2017).
However, in May 2017 the Board decided to finalise the amendments as a narrow
scope amendment in its own right.
The amendments clarify that an entity applies IFRS 9 to long-term interests in an
associate or joint venture to which the equity method is not applied but that, in
substance, form part of the net investment in the associate or joint venture. This
clarification is relevant because it implies that the expected credit loss model in IFRS 9
applies to such long-term interests.
The Board also clarified that, in applying IFRS 9, an entity does not take account of any
losses of the associate or joint venture, or any impairment losses on the net investment,
recognised as adjustments to the net investment in the associate or joint venture that
arise from applying IAS 28.
To illustrate how entities apply the requirements in IAS 28 and IFRS 9 with respect
to long-term interests, the Board also published an illustrative example when it
issued the amendments.
The amendments are effective for periods beginning on or after 1 January 2019. Earlier
application is permitted. This will enable entities to apply the amendments together
with IFRS 9 if they wish to do so but leaves other entities the additional implementation
time they had asked for.
The amendments are to be applied retrospectively but they provide transition
requirements similar to those in IFRS 9 for entities that apply the amendments after
they first apply IFRS 9.
12.4.5
Equity accounted investments and CGUs
IAS 28 states that the recoverable amount of an investment in an associate or a joint
venture should be assessed for each associate or joint venture, unless it does not
generate cash inflows from continuing use that are largely independent of those from
other assets of the entity. [IAS 28.43]. This means that each associate or joint venture is a
separate CGU unless it is part of a larger CGU including other assets, which could
include other associates or joint ventures.
Impairment of fixed assets and goodwill 1535
Example 20.40: Joint ventures are part of larger CGU
A mining entity (group) extracts a metal ore that does not have an active market until it has been through a
smelting and refining process. Each mine is held in a separate subsidiary, as is the refinery, and in two joint
ventures. The refinery, subsidiaries and joint ventures are located in several different countries. The entity
considers the CGU to comprise the subsidiary that holds the smelter together with the subsidiaries that hold
the individual mines and the interests in the joint ventures.
If there is goodwill in the carrying amount of an associate or joint venture, this is not
tested separately. [IAS 28.42]. However, there may be additional goodwill in the group that
will be allocated to a CGU that includes an associate or joint venture, that will be tested
for impairment by reference to the combined cash flows of assets and associates and
joint ventures.
12.4.6
Equity accounted investments and testing goodwill for impairment
When calculating its share of an equity accounted investee’s results, an investor makes
adjustments to the investee’s profit or loss to reflect depreciation and impairments of
the investee’s identifiable assets based on their fair values at the date the investor
acquired its investment. This is covered in IAS 28 which states that:
‘Appropriate adjustments to the investor’s share of the associate’s or joint venture’s
profits or losses after acquisition are also made to account, for example, for
depreciation of the depreciable assets, based on their fair values at the acquisition
date. Similarly, appropriate adjustments to the investor’s share of the associate’s or
joint venture’s profits or losses after acquisition are made for impairment losses
recognised by the associate, such as for goodwill or property, plant and equipment.’
[IAS 28.32].
Although this refers to ‘appropriate adjustments’ for goodwill impairment losses, this
should not be interpreted as requiring the investor to recalculate the goodwill
impairment on a similar basis to depreciation and impairment of tangible and intangible
assets. The ‘appropriate adjustment’ is to reverse that goodwill impairment that relates
to pre-acquisition goodwill in the investee before calculating the investor’s share of the
investee’s profit. After application of the equity method the entire equity-accounted
carrying amount of the investor’s investment, including the goodwill included in that
carrying amount, is tested for impairment in accordance with IAS 28. [IAS 28.40-43]. Note
that there is no requirement to test investments in associates or joint ventures for
impairment annually but only when there are indicators that the amount may not be
recoverable. These requirements are described in detail in Chapter 11 at 9.
Impairment write-offs made against investments accounted for under the equity
method may be reversed if an impairment loss no longer exists or has decreased (see 11.4
above). Although IAS 36 does not allow impairments of goodwill to be reversed,
[IAS 36.124], this impairment is not a write-off against goodwill, but a write-off against the
equity investment, so this prohibition does not apply. IAS 28 states that ‘an impairment
loss recognised in those circumstances is not allocated to any asset, including goodwill,
that forms part of the carrying amount of the investment in the associate or joint
venture. Accordingly, any reversal of that impairment loss is recognised in accordance
with IAS 36 to the extent that the recoverable amount of the investment subsequently
increases’. [IAS 28.42].
1536 Chapter 20
13
IFRS 16 IMPAIRMENT CONSIDERATION
With the adoption of IFRS 16 lessees will record a right-of-use asset and a le
ase liability
for most of their lease arrangements in their statement of financial position. Under IAS 17
– Leases, no such assets were recognised for operating leases. On adoption of IFRS 16 a
‘new’ asset will arise and will be recorded in the statement of financial position. These
right-of-use assets under IFRS 16 are subject to the impairment requirements of IAS 36.
Under IAS 17 operating leases were not tested for impairment under IAS 36, instead IAS 37
applied and operating leases were assessed as to whether they qualified as an onerous
lease contract for which a provision needed to be recognised. For lessees that had entered
into contracts classified as operating leases under IAS 17, the adoption of IFRS 16 could
have a significant impact on the amount of assets recorded in the statement of financial
position and therefore the carrying value of assets tested for impairment.
13.1 When to test right-of-use assets for impairment
Similar to other assets, right-of-use-assets will only be tested for impairment when
impairment indicators exist. If impairment indicators exist, an entity will have to determine
whether the right-of-use-asset can be tested on a stand-alone basis or whether it will have
to be tested on a cash-generating unit level. This will depend on whether the right-of-use-
asset generates largely independent cash inflows from other assets or groups of assets.
While there might be instances where leased assets generate largely independent cash
inflows, many leased assets will be used by an entity as an input in its main operating
activities whether these are service providing or production of goods related. It is
therefore likely that many right-of-use-assets will be assessed for impairment on a CGU
level rather than on individual asset level.
Even if there are no impairment indicators at the right-of-use-asset level or the CGU
level the right-of-use-asset belongs to, these right-of-use-assets will impact the annual
goodwill impairment test by increasing the carrying amount of the CGU/group of CGUs
at which goodwill is assessed for impairment.
13.2 Treatment of lease liabilities
The recognition of right-of-use assets with corresponding lease liabilities raises the question
of whether and how the lease liabilities associated with the right-of-use assets should be
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 303
