Impairment testing of investments in associates and joint ventures can be challenging under IFRS Accounting Standards.
From the IFRS Institute – March 3, 2026
Authors: Paulo Pinheiro, Ingo Zielhoff, Elena Byalik, Valerie Boissou
Determining when and how investments in associates and joint ventures accounted for under the equity method are tested for impairment is not always straightforward. This complexity arises because the equity method guidance interacts with the financial instruments guidance when an investor holds not only equity interests but also loans to the investee. In this article, we revisit the overall impairment requirements for investments in equity method investees under IFRS Accounting Standards and compare them to US GAAP.
Applying the equity method to associates and joint ventures in accordance with IAS 281 requires an investor to recognize its share of the investee’s comprehensive income or loss. This includes the investor’s share of any impairment loss recorded by the investee on its own underlying assets.
Separately, the investor is required to test the carrying amount of its investment for impairment if objective evidence of impairment exists. IAS 28 identifies events that may trigger the impairment test and refers to the requirements of IAS 362 for performing the test. Impairment testing of investments in associates and joint ventures often requires significant judgments and estimates to be made.
Further complications arise when the investor holds not only equity interests, but also loans to the investee, for example, or when the investee is loss-making.
In this article, we also explain the process of accounting for the net investment in an equity method investee step by step.
The net investment in an equity method investee comprises two main components.
The investor applies IFRS 9 independently to financial instruments included in the net investment to which the equity method is not applied (i.e. the LTIs). This requirement may sound obvious because IFRS 9 provides measurement guidance, including the expected credit loss impairment model for loans. However, it creates a loss-recognition ordering challenge in certain situations, which we explain in the example below.
Typically, an investor applies the equity method by recognizing its share of the investee’s profit or loss and adjusting the carrying amount of the equity method investment for the corresponding amount. Complications arise when the investee is loss-making. In that case, the investor recognizes its share of the losses until the net investment (i.e. equity and LTI) is reduced to zero4. When losses to be recognized exceed the equity method interest, any further share of losses is allocated to the LTIs in the reverse order of seniority, after applying IFRS 9 in Step 2.
Here we present a simplified example in which Investor has a 40% interest in Investee. Investor also has provided a long-term loan that is not collateralized and is not planned or likely to be settled in the foreseeable future.
Assumptions are shown in italics.
Net investment in Investee ($) | IAS 28 | IFRS 9 | Total | Disclose |
Carrying amount of 40% equity interest (equity method) | 140 | - | 140 |
|
Carrying amount of loan (LTI) (amortized cost) | - | 70 | 70 |
|
Balance at end of Year 1 (Step 1 for Year 2) | 140 | 70 | 210 | - |
Year 2 accounting: | ||||
Step 2: IFRS 9 applied to LTI and loss allowance recognized | - | (20) | (20) |
|
Step 3: Investor’s 40% share of loss of Investee ($500 × 40 % = $200) recognized to extent of $140 equity interest | (140) | - | (140) |
|
Step 2/3 interaction: Share of loss of Investee ($200 - $140 = $60) recognized to extent of LTI | - | (50) | (50) |
|
Unrecognized share of loss carried forward but disclosed ($200 - $140 - $50 = $10) | - | - | - | (10) |
Balance at end of Year 2 (Step 1 for Year 3) | - | - | - | (10) |
Year 3 accounting: | ||||
Step 2: IFRS 9 applied to LTI of $50 (i.e. ignoring Year 2 loss allocation of $50) and the Year 1 impairment loss is reversed | - | 20 | 20 |
|
Step 3: Investee has zero profit or loss for the year; therefore, no share for Investor to recognize | - | - | - |
|
Step 2/3 interaction: Recognize previously unrecognized loss because now there is a balance against which it can be recognized | - | (10) | (10) |
|
Balance at end of Year 3 | - | 10 | 10 | - |
Comparison to US GAAP |
Like IFRS Accounting Standards, under US GAAP, when an equity method investee incurs losses, the carrying amount of the investor’s interest is reduced, but not to below zero. Further losses are generally recognized only to the extent that the investor has an obligation to fund those losses. Unlike IFRS Accounting Standards, additional losses may also be recognized if the investee is expected to return to profitability imminently, or if a subsequent further investment in the investee is in substance the funding of such losses. Like IFRS Accounting Standards, an investor applies the financial instruments guidance (including the current expected credit loss (CECL) model) to LTIs in the investee that is not accounted for under the equity method. Unlike IFRS Accounting Standards, this guidance is applied only after the loss-absorption and impairment requirements for equity method investees (see Step 4 below) have been applied. |
An investor assesses whether there is an indication that its net investment in the associate or joint venture is impaired. IAS 28 provides potential indicators, including (but not limited to) significant financial difficulty of the investee, and significant adverse changes in the technological, market, economic or legal environment in which the investee operates.
If objective evidence of impairment exists, the investor performs an impairment test. The net investment (as determined in Steps 1 to 3) is tested as one single asset under IAS 36, by comparing its carrying amount to the recoverable amount. The carrying amount includes any fair value adjustments and goodwill arising from the acquisition of the investment – i.e. the goodwill is not tested separately or allocated to a larger cash-generating unit.
Recoverable amount is the higher of value in use and fair value less costs of disposal. An investor may determine the value in use of the investment by calculating either:
The investor compares the recoverable amount with the carrying amount of the net investment after applying the equity method to determine any additional impairment loss. If the carrying amount of the net investment is higher than the recoverable amount, the investor recognizes an impairment loss on the investment as a whole.
Any impairment loss is subsequently reversed only to the extent that the recoverable amount of the investment increases.
Comparison to US GAAP |
Like IFRS Accounting Standards, an equity method investment is tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. Indicators of impairment under both IFRS Accounting Standards and US GAAP are similar. Unlike IFRS Accounting Standards, under US GAAP, an impairment loss is generally recognized only if the impairment is ‘other than temporary’. Once an investment is deemed other than temporarily impaired, the loss is measured based on the investee’s fair value. In addition, unlike IFRS Accounting Standards, impairment losses cannot be reversed. |
Under IFRS Accounting Standards, impairment testing for equity method investees is a multi-step process. After applying IFRS 9 to any LTIs and recognizing the investor’s share of profit or loss under IAS 28, the entire net investment is tested for impairment under IAS 36 when an indicator of impairment exists. This required sequencing can be complex and may result in differences with US GAAP.
Limited access to the investee’s cash flow projections may further complicate impairment testing at the investment level. Estimates should be reasonable and supportable, and investors may consider using sensitivity analyses to assess the robustness of key assumptions.
Overall, investors should maintain impairment processes and internal controls that appropriately address these complexities, with judgments that are clearly articulated and well documented.
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