IAS 28 - Adjusted Impairment Expense & 'splitting' of an asset

[Tre-Lois]

Hi all. Please consider the following scenario:

• Company P acquires 50% of Company A for 400. It is accounted as an associate in accordance with IAS 28.

• A has one single asset with a book value of 100. The fair value of this asset is 800.

• There has been no depreciation, impairments or any other results.

A then ‘splits’ this asset in to two – asset A and asset B. The book value of both of these assets is now 50 (within A's books). The fair value (at acquisition date) of these two assets can be determined and was 400 each.
A then performs an impairment test over these two assets. Asset A’s recoverable value is 520 and B’s is 320. No impairment is recorded by A.

My question is whether P should now be treating this asset as two different assets as well? Or should it continue to treat as ‘one’ asset?
The answer to this would have implications for P recording its share of an adjusted impairment expense in accordance with IAS 28.32. If P still treats it as ‘one’ asset, then the total recoverable value of the asset exceeds the carrying value and there is no impairment. But if P also splits it up in to two assets, then it would have to record a loss due to the impairment in Asset B of 40 = 50% of (400-320).

I've tried to better illustrate this in the attachment.

Thank you in advance.

[Marek Muc]

There isn't a 'look-through' approach, and P should view its investment in A as a singular asset rather than examining the underlying assets individually. The key question is: what is the recoverable amount of the investment in A? Could you also provide further details on this asset division?

[Tre-Lois]

But P is required to take to take its share of A's results. A's results are 0 (because A incurred no impairment). But these results need to be adjusted because of the fair value adjustments recognized by P (IAS 28.38). These 'adjusted' results could be -80 (-40 when taking P's 50% share).

To clarify - this question is not about an impairment test performed by P (where I agree it would treat its investment in S as a single asset). This is about P recording its adjusted share of S's result.

Regarding the asset division, I don't have too many details on this. This was an asset that was originally going to generate one set of cash flows. It now produces two sets of independent cash flows (and is now treated as two separate assets by the investment). Though I don't have a lot of insight over this.

[Marek Muc]

As long as the recoverable amount of investment exceeds the carrying amount in P's books, there won't be any impairment (the carrying amount in P's books takes fair value adjustments into account).

[Tre-Lois]

Hi Marek. I am referring to P taking its share of A's results. These results include impairment losses recognized by A (or in this case, the lack of impairment losses).

These results need to be adjusted because P measured its interest in S's asset at fair value at the date of acquisition. Therefore, the value that P attributes to S's asset differs from the carrying amount of the asset in S's own books. As such P must also adjust its share of any impairment losses recognized by S for such basis differences.

This question is not about whether P should impair A or not. Sorry if I am making myself unclear.

[Marek Muc]

It still seems to me that you're trying to test A's assets for impairment individually, which isn't required for equity-accounted investments. That's my answer to your question

[Tre-Lois]

Another clarification: it was A who tested their assets for impairment individually. P received the results of these tests and has adjusted them in accordance with my interpretation of IAS 28.38.

[Tre-Lois]

Hi again. I will rephrase the question slightly. Hope this clarifies.

• Company P acquires 50% of Company A for 600. It is accounted as an associate in accordance with IAS 28.

• A has three assets with a book value of 950. The fair value of these three assets is 1200.

• There has been no depreciation, impairments or any other results.

A then performs impairment tests over its three assets. A incurs an impairment expense of 100 because of Assets A and C. A's result for the period is a loss of 100. When it comes to P recording its share of A's result, P does not simply take its 50% share of this loss of 100, but has to factor in the fair value adjustments in A's impairment tests. This is illustrated in the attached example.

In the example, does P recognize a loss from associated companies of 125? Or does it recognize no loss, because the fair value of P's share of A's net assets (675) exceeds the corresponding net "book value" (600).

[Marek Muc]

I'd simply recognise a 50% share in impairment losses incurred by A, that is $50, and no further impairment on the investment in A.

[Tre-Lois]

But is that consistent with the knowledge base? "Impairment losses recognised by an associate or joint venture may not always be incorporated into the investor’s financial statements in the same amount. This discrepancy is primarily due to fair value adjustments and goodwill recognised by the investor."

https://ifrscommunity.com/knowledge-bas ... impairment

[Marek Muc]

Yes!

It's common to see the investment value in the parent's books being more than the asset value as seen by the associate. Consequently, the parent company might have to account for further impairment. Yet, in your particular case, the assets' recoverable amount exceeds the investment's carrying amount.