Overview

What you’ll learn:

• What impairment really means in simple terms
• Why impairment can be recognised before cash losses occur
• Common warning signs that trigger an impairment review in property JVs
• How impairment is assessed for equity-accounted investments
• What happens when JV losses reduce the investment balance to zero

This episode focuses on judgement, logic, and early warning, not calculations.

Best for:

• Offshore finance teams supporting JV reporting and month-end close
• Team members reviewing project reports and feasibility updates
• Finance staff preparing numbers for management or audit review
• Anyone unsure when a project issue becomes an accounting issue

Completion of Episodes 3–5 is recommended.

• Estimated time: 6 mins

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Chapter 6 Impairment & Losses and Downturns

Context: This note details the accounting treatment for equity-accounted investments (EAI) when the investee incurs losses that exceed the investor’s carrying amount, or when objective evidence indicates the investment may be impaired. It references AASB 128 Investments in Associates and Joint Ventures and AASB 136 Impairment of Assets.

1. The "Net Investment" Concept

When applying the equity method, the investor must define the "investment" against which losses are applied. Under AASB 128, the net investment is broader than just the ordinary shares held.

• Definition: The net investment includes the carrying amount of the investment determined using the equity method plus any long-term interests that, in substance, form part of the entity’s net investment in the associate or joint venture.
• Inclusions: Items for which settlement is neither planned nor likely to occur in the foreseeable future. Examples include preference shares and long-term receivables or loans,.
• Exclusions: Trade receivables, trade payables, or any long-term receivables for which adequate collateral exists (e.g., secured loans) are excluded from the net investment definition,.
• Ordering Rule (AASB 9 vs AASB 128): An investor applies AASB 9 Financial Instruments to long-term interests (e.g., impairment of loans) before applying the loss allocation rules of AASB 128.

1. Treatment of Losses Exceeding Investment

Equity accounting does not typically result in the recognition of a liability for the associate's losses unless specific obligations exist.

• The "Zero Floor": If an investor’s share of losses equals or exceeds its interest in the associate or joint venture, the investor reduces the carrying amount of the investment to nil and discontinues recognising further losses.
• Allocation Order: Losses are applied to the components of the net investment in the reverse order of their seniority (i.e., priority in liquidation). For example, losses are applied to ordinary equity first, then preference shares, then unsecured long-term loans,.
• Recognition of Additional Losses: An investor recognizes a liability for additional losses only to the extent that it has:

◦ Incurred legal or constructive obligations; or

◦ Made payments on behalf of the associate or joint venture.

◦ Example: A parent company guarantee or a binding commitment to provide ongoing funding would trigger loss recognition beyond zero.

1. Suspended Losses

When the equity method is suspended because the investment balance has reached zero, the investor must track the unrecognized losses off-balance sheet (often referred to as "memo accounts").

• Resumption of Profit Recognition: If the investee subsequently reports profits, the investor resumes recognizing its share of those profits only after its share of the profits equals the share of losses not previously recognized.
• Tracking Requirements: The investor continues to track its share of the investee’s net losses and other comprehensive income (OCI) separately to determine when the "suspended" amount has been recovered.

1. Impairment of Equity-Accounted Investments

After applying equity method losses, the investor assesses whether there is objective evidence of impairment.

Objective Evidence (Triggers) under AASB 128 The net investment is impaired if there is objective evidence of impairment as a result of one or more events that occurred after initial recognition (a "loss event"). Triggers include:

• Financial Difficulty: Significant financial difficulty of the associate or joint venture.
• Breach of Contract: Default or delinquency in payments by the investee.
• Concessions: Granting a concession to the investee due to financial difficulty that would not otherwise be considered.
• Market Environment: Significant adverse changes in the technological, market, economic, or legal environment in which the investee operates.
• Fair Value Decline: A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost.

Impairment Testing (Link to AASB 136) Because goodwill forming part of the carrying amount of the net investment is not separately recognized, it is not tested for impairment separately. Instead, the entire carrying amount of the investment is tested as a single asset in accordance with AASB 136,.

• Recoverable Amount: The higher of Value in Use (VIU) and Fair Value Less Costs of Disposal (FVLCD).
• Value in Use Calculation: In determining VIU, the entity estimates either:

1. Its share of the present value of estimated future cash flows expected to be generated by the investee (operations + ultimate disposal); or
2. The present value of estimated future cash flows expected to arise from dividends to be received from the investment + ultimate disposal.

• Reversal: Any impairment loss recognized is not allocated to specific assets (like goodwill) within the EAI. Therefore, reversals of impairment are permitted under AASB 136 if the recoverable amount subsequently increases.

1. Indicators in Property Downturns

In the property sector, specific commercial indicators often precede accounting impairment triggers.

• Development Feasibility: Downward revisions in project feasibility due to construction cost escalation, planning delays (e.g., DA delays), or slower pre-sales rates.
• Market Conditions: A decline in property prices, market rental rates, or an oversupply of properties in a specific geography.
• Strategic Shifts: Decisions to exit specific markets or sectors (e.g., exiting international construction or development) can trigger recoverability assessments for associated inventory and equity accounted investments.
• Financing: Increases in interest rates or potential breaches of loan covenants within the JV structure.

Key Takeaways

• Impairment is a write-down of value, not a cash payment
• Rising costs, delays, or weak sales are common impairment triggers
• Equity-accounted JVs are tested as a whole, not asset by asset
• Losses usually stop once the investment reaches zero
• Guarantees or funding commitments can require further loss recognition

Common Mistakes / Watch-outs

• Waiting for cash losses before considering impairment
• Ignoring early warning signs in project reports
• Assuming impairment only happens at year-end
• Continuing to book losses below zero without checking commitments
• Failing to document assumptions used in impairment assessments

🧠 Practical reminder

Impairment is not about pessimism.

It is about recognising reality early, so stakeholders are not surprised later.

If the project story has changed, the numbers usually must change too.

Quick Links

• Next episode →Episode 7 – Audit Pitfalls
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