Impairment (Equity Method) - Level II FRA

IFRS:
Under IFRS, impairment is based on the following conditions:
· There must be objective evidence of impairment as a result of one or more loss events and
· loss event has an impact on the investment’s future cash flows which can be reliably estimated.

Investment is impaired when:
Carrying amount of investment > Recoverable amount
where,
Recoverable amount is the higher of “value in use” or Net selling price.
Value in use = PV of estimated future cash flows
Net selling price = Fair value – Cost to sell
Accounting Treatment of Impairment loss:
· Impairment loss is recognized on the Income Statement.
· The carrying amount of the security is reduced either directly or through the use of an allowance account


Under U.S. GAAP
Investments are considered impaired only when:
Fair value of investment < carrying value and this decline is determined to be permanent.
Accounting Treatment of Impairment loss:
· Impairment loss is recognized on the Income Statement.

· Carrying value of the investment on the Balance Sheet is reduced to its fair value.
Reversal of Impairment Loss:
Both IFRS and U.S. GAAP prohibit the reversal of impairment losses.