at 31 december 2013 entity b which prepares its financial statements under ifrs has 611782

Entity A has a 40% interest in Entity B. Entity A has significant influence over Entity B and accounts for its investment under the equity method.

At 31 December 2013, Entity B, which prepares its financial statements under IFRS, has carried out impairment tests under IAS 36 and recognised an impairment loss of $140,000 calculated as follows:

In accounting for its associate, Entity B, in its consolidated financial statements for the year ended 31 December 2013, should Entity A reflect its 40% share of this impairment loss of $140,000?

As indicated earlier at  above, it is generally not appropriate for the investor to simply multiply the amount of the impairment recognised in the investee”s own books by the investor”s percentage of ownership, because the investor should initially measure its interest in an associate”s identifiable net assets at fair value at the date of acquisition of an associate. Accordingly, appropriate adjustments based on those fair values are made for impairment losses recognised by the associate .

Prior to the recognition of the impairment loss by Entity B, the carrying amount of Entity A”s 40% interest in the net assets of Entity B, after reflecting fair value adjustments made by Entity A at the date of acquisition, together with the goodwill arising on the acquisition is as follows:

In applying the equity method, Entity A should compare its 40% share of the cash flows attributable to each of Entity B”s CGUs to determine the impairment loss it should recognise in respect of Entity B. Accordingly, in equity accounting for its share of Entity B”s profit or loss, Entity A should recognise an impairment loss of $180,000 calculated as follows:

In addition, after applying the equity method, Entity A should calculate whether any further impairment loss is necessary in respect of its investment in its associate.

The carrying amount of Entity A”s investment in Entity B under the equity method (after reflecting the impairment loss of $180,000 would be as follows:

Based on Entity A”s 40% interest in the total recoverable amount of Entity B of $460,000, Entity A would not recognise any further impairment loss in respect of its investment in the associate.

It should be noted that the impairment loss recognised by Entity A of $180,000 is not the same as if it had calculated an impairment loss on its associate as a whole; i.e. by comparing its 40% share of the total recoverable amount of Entity B of $460,000 to its investment in the associate of $600,000 (prior to reflecting any impairment loss on its share of Entity B”s net assets). Such an approach would only be appropriate if Entity B did not have more than one CGU. However, if in this example, the goodwill on the acquisition had been at least $80,000, the overall impairment loss recognised would have been the same, irrespective of whether the impairment loss had been calculated on an overall basis or as in the example.