Impairment at Parent Level and Group Level

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Porus
Posts: 59
Joined: 13 Aug 2020, 20:13

Impairment at Parent Level and Group Level

Post by Porus »

Dear All,

Greatly appreciate your views on the below scenario.

A UAE Parent has invested $ 150 in a Spanish 100% sub. The Parent has also lent $ 200 which carries interest at market rates and is repayable after 5 years. Total carrying value of the investment + loan as at reporting date is therefore $ 350.

Using this money, the Spanish sub purchased land and buildings which are being used as investment property ie. generating income from property rental. The carrying value of these properties at the reporting date is $ 280. The sub incurs cash costs for the running and maintenance of these properties.

Owing to indicators of impairment (driven primarily by post-Covid drop in tourism, etc), the UAE Parent carries out an impairment exercise at the reporting date, using post-tax cashflow estimates over the next 10 years, ie. this is what it will get as returns from its investment. Apart from operational cashflows, the Parent also includes in its cashflow estimates, the repayment (collection) of the loan 5 years down the line, from the sub. The Present Value (PV) of operational cashflows is $ 175. The PV of the loan repayment is $ 125. So total PV is $ 300, and the Parent books an impairment loss of $ 50 (300-350) in its standalone financial statements.

After a few months, the Parent prepares consolidated financial statements. The same post-tax operational cashflows for 10 years are used in this exercise, the PV of such cashflows being $ 175 (as above). Since at group level, the loan/investment from Parent to Sub will get eliminated, so the PV of the loan repayment by the sub to the Parent ($ 125) is not included in this exercise. Comparing the carrying value of the properties at the reporting date $ 280, with the PV of post-tax cashflows $ 175, yields an impairment loss at Group level of $ 105 (175-280).

Question is: In terms of consolidation mechanics, this appears to be correct. But is it logical that in the Standalone financial statements, the Parent books an impairment loss of $ 50 against the investment+loan, while at Group level, in the Consolidated financial statements, a higher impairment loss of $ 105 is booked against the investment properties, simply because we have to ignore the cash inflow (PV) of $ 125 arising from the loan repayment by the sub to the Parent ? Should the impairment loss remain identical in both the standalone and consolidated financials, given that the source of the impairment - the investment properties - is the same in both cases ?
JRSB
Trusted Expert
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Joined: 01 Mar 2020, 01:10
Location: UK

Re: Impairment at Parent Level and Group Level

Post by JRSB »

Presumably at group level this measurement is a fair value adjustment to investment property.

There may be a difference between standalone and consol impairments for all sorts of reasons. Eg the loan from parent to sub should come under ECL approach too.
Leo
Posts: 908
Joined: 05 Apr 2020, 22:31

Re: Impairment at Parent Level and Group Level

Post by Leo »

I think impairment test performed by the parent to test it's investments in sub and intercompany loan is one thing,
and impairment test of the asset is another thing. Those test should not be intertwined.

For the impairment test of the asset, should the present value still be 175 considering that the intercompany loan shouldn't come in to play ?

Furthermore, at the standalone level, if you think that the value of the sub is less than the value of the investment, it means that the asset in sub has less value too. Shouldn't the sub impair it's asset in it's standalone FS ?

I think, sub should impair it's asset for XX amount, and parent should impair it's investment in sub, and if it's not enough, impair the intercompany receivable.
at conso level, all the impairments done by parent should be written off (because intercompany). which only left the impairment done by sub.
Hence, you might have the same amount between conso and statutory.

But again, assumptions for impairment at conso level might be different than the impairment performed by the local accountant. This will make the PV different. This is because the smallest identifiable CGU is not the same from the conso perspective and from the standalone perspective.
Porus
Posts: 59
Joined: 13 Aug 2020, 20:13

Re: Impairment at Parent Level and Group Level

Post by Porus »

Thanks all.
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