How Equity Method Investments Are Tested for Impairment under IAS 28 and ASC 323

Graziano Stefanelli
2 hours ago
5 min read

Equity method investments represent an investor’s ownership interest in associates or joint ventures over which it exercises significant influence, but not control. These investments are carried at cost plus the investor’s share of post-acquisition profits or losses, adjusted for dividends and other comprehensive income of the investee.

Under IFRS (IAS 28) and US GAAP (ASC 323), when indications of impairment arise, the carrying amount must be compared with the recoverable amount (IFRS) or fair value (GAAP). Any excess of carrying amount over recoverable value is recognized immediately in profit or loss. Although both frameworks aim to prevent overstatement of investment values, they differ in how the impairment test is triggered, measured, and reversed.

·····

.....

How equity method investments operate

Equity method accounting recognizes the investor’s share of the investee’s net assets, not market value.

Initial recognition:

Debit: Investment in Associate 5,000,000
Credit: Cash 5,000,000

Subsequent measurement:

Increase for investor’s share of investee profit:
- Dr Investment in Associate xx
- Cr Equity in Earnings of Associate xx
Decrease for dividends received:
- Dr Cash xx
- Cr Investment in Associate xx

These changes continue until the investment is disposed of or becomes impaired.

·····

.....

When an impairment test is required

IFRS (IAS 28.40–42):An impairment test is triggered when there is objective evidence of impairment, such as:

Significant decline in the investee’s market value.
Deterioration in the investee’s financial performance or cash flow.
Adverse changes in the business or legal environment.
Evidence of default or restructuring.
Indications that the investor will not recover the carrying amount.

US GAAP (ASC 323-10-35-31):An impairment test is required when a loss in value is determined to be other than temporary (OTTI).Indicators are similar to IFRS, but the assessment is more qualitative, emphasizing management judgment on whether declines are recoverable.

·····

.....

IFRS impairment testing process (IAS 36 applied by analogy)

Under IFRS, IAS 28 refers to IAS 36 for guidance on determining the recoverable amount. The recoverable amount is the higher of:

Value in use — present value of the investor’s share of future cash flows expected from the investment, including cash flows from operations and potential disposal.
Fair value less costs of disposal — the price that could be obtained from selling the investment in an orderly transaction.

Example:

Carrying amount of investment: €6,000,000
Value in use: €5,400,000
Fair value less costs of disposal: €5,100,000

Recoverable amount = higher of €5,400,000 and €5,100,000 = €5,400,000.

Impairment = €6,000,000 − €5,400,000 = €600,000.

Entry:

Debit: Impairment Loss on Associate 600,000
Credit: Investment in Associate 600,000

Important:If the investment includes goodwill, that goodwill is not tested separately but as part of the single investment carrying amount.

Reversals are permitted if the recoverable amount increases in future periods.

Example reversal:If recoverable amount rises to €5,700,000 in the next year:

Debit: Investment in Associate 300,000
Credit: Reversal of Impairment (P&L) 300,000

·····

.....

US GAAP impairment testing process (ASC 323)

Under ASC 323, an impairment loss is recognized when the investment’s fair value falls below its carrying amount and the decline is other than temporary.

Unlike IFRS, GAAP does not require a “value in use” computation. Instead, fair value (exit price) governs the test.

Example:

Carrying amount: $6,000,000
Fair value: $5,200,000

If management concludes the decline is other than temporary, recognize:

Debit: Impairment Loss on Equity Method Investment 800,000
Credit: Investment in Associate 800,000

The impairment establishes a new cost basis for the investment. Future recoveries are not reversed under GAAP, even if fair value recovers.

Qualitative judgment:Temporary declines caused by market volatility or short-term events (e.g., cyclical downturns) may be ignored. Long-term deterioration or fundamental issues trigger recognition.

·····

.....

Comparative framework — IAS 28 vs ASC 323

Topic	IFRS (IAS 28 / IAS 36)	US GAAP (ASC 323)
Trigger for test	Objective evidence of impairment	Decline in value deemed other than temporary
Measurement basis	Higher of value in use or fair value less costs to sell	Fair value only
Goodwill treatment	Not separately tested; part of investment	Not separately tested
Reversal permitted	Yes, if recoverable amount increases	No reversals allowed
Subsequent basis	Carrying amount after reversal	New cost basis after impairment
Disclosure focus	Key assumptions, cash flow projections, discount rates	Fair value method, rationale for OTTI conclusion

·····

.....

Example of impairment computation under IFRS

Component	Amount (€)
Carrying amount of investment	6,000,000
Estimated future cash flows (present value)	5,400,000
Recoverable amount	5,400,000
Impairment recognized	600,000

Journal entries:

Dr Impairment Loss 600,000
Cr Investment in Associate 600,000

If future value in use increases by €300,000, IFRS reversal is allowed:

Dr Investment in Associate 300,000
Cr Reversal of Impairment 300,000

Under US GAAP:Same facts, but only fair value test:

Dr Impairment Loss 800,000
Cr Investment in Associate 800,000

(No reversal even if recoverable value rises later.)

·····

.....

Disclosure requirements

IFRS (IAS 36.126–130):Entities must disclose:

Nature and segment of the impaired investment.
Events and circumstances leading to impairment.
Amount of impairment and reversal recognized.
Key assumptions and discount rates used in value-in-use computation.

US GAAP (ASC 323-10-50):Disclosures must include:

Description of the impaired investment.
Circumstances causing impairment.
Method used to determine fair value.
Amount of impairment loss recognized and effect on results.

Example (IFRS disclosure):

During 2025, the Group recognized an impairment loss of €0.6 million on its 30% interest in Company Z due to deteriorating market conditions and declining profitability. The recoverable amount of €5.4 million was based on discounted cash flow projections using a pre-tax discount rate of 10%.

·····

.....

Journal entries summary

IFRS

Recognize impairment:
- Dr Impairment Loss on Associate xx
- Cr Investment in Associate xx
Reverse impairment (if applicable):
- Dr Investment in Associate xx
- Cr Reversal of Impairment xx

US GAAP

Recognize OTTI:
- Dr Impairment Loss xx
- Cr Investment in Associate xx
No reversal permitted.

·····

.....

Impact on financial performance and ratios

Earnings volatility: IFRS allows reversals, creating potential asymmetry with GAAP where losses are permanent.
Equity ratios: Impairments reduce total assets and equity; reversals under IFRS can restore them.
Return on assets (ROA): Temporary declines under GAAP permanently reduce asset base, affecting comparability.
Deferred tax: Impairments often create deductible temporary differences.

Analysts comparing IFRS and GAAP entities should adjust for timing differences in impairment recognition and reversals when assessing performance.

·····

.....

Operational considerations

Perform regular monitoring of investee financials for early impairment indicators.
Document valuation assumptions and sensitivity analyses for audit support.
Consider currency effects for foreign associates when determining recoverable amounts.
Align with group impairment policy and disclose judgmental areas transparently.
For multinational groups, reconcile differences in reversal rules and valuation inputs to ensure consistent internal metrics.

Accurate impairment testing under IAS 28 and ASC 323 ensures that investments in associates are carried at realistic recoverable values, maintaining the reliability and comparability of reported financial positions.

·····

.....

DATA STUDIOS

.....[datastudios.org]