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ACCA Strategic Professional · Strategic Business Reporting (International) · Associates and joint arrangements

Parent's investment in Associate Co has a carrying amount of $20 million after applying the equity method. Associate Co has lost its main customer and Parent's finance director proposes ignoring an impairment review, arguing that the investment cost was paid recently and the loss of the customer is temporary. Which is the correct application of IFRS Accounting Standards?

Parent must assess for objective evidence of impairment, and the loss of a main customer is such an indicator. If it exists, the entire carrying amount of the associate is tested under IAS 36 as a single asset, not goodwill alone, and the loss is recognised in profit or loss.

  1. ANo review is needed because goodwill within an associate is never tested for impairment
  2. BParent should apply IAS 28 by assessing objective evidence of impairment, and if found, test the whole carrying amount under IAS 36 as a single assetCorrect
  3. CParent should test only the goodwill element for impairment and ignore the remainder of the investment
  4. DParent should reduce the investment to nil immediately and recognise the loss in other comprehensive income

Explanation

IAS 28 requires an assessment of objective evidence of impairment after applying the equity method; loss of a main customer is an indicator. If evidence exists, the entire carrying amount is tested under IAS 36 as a single asset. Goodwill is not separately tested, so option C is wrong. Management's optimism does not remove the requirement.

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