Investment Impairment under UK GAAP

UK GAAP requires companies to assess at each reporting date whether there is any indication that an investment might be impaired. An impairment loss arises when the recoverable amount of an investment is less than its carrying amount on the balance sheet.

Scope

The impairment requirements primarily apply to investments accounted for at cost or amortised cost. Investments measured at fair value (e.g., through profit or loss or other comprehensive income) are subject to fair value adjustments, not impairment, as fair value already reflects market perceptions of value.

Indications of Impairment

Companies must actively look for both internal and external indications that an investment’s value has declined. Examples include:

Significant financial difficulty of the investee.
Breach of contract by the investee, such as defaulting on payments.
A high probability of the investee entering bankruptcy or financial reorganisation.
Significant adverse changes in the technological, market, economic, or legal environment in which the investee operates.
A significant decline in the fair value of the investment for a prolonged period.
Disappearance of an active market for the investment.

Recoverable Amount

If there is an indication of impairment, the recoverable amount must be determined. The recoverable amount is the higher of:

Fair value less costs to sell: The amount obtainable from the sale of the investment in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal.
Value in use: The present value of the future cash flows expected to be derived from the investment. This involves forecasting future cash inflows and outflows attributable to the investment and discounting them using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the investment.

Recognition and Measurement of Impairment Loss

If the carrying amount of the investment exceeds its recoverable amount, an impairment loss is recognised. The impairment loss is the difference between the carrying amount and the recoverable amount.

The impairment loss is recognised immediately in profit or loss, unless the investment was previously revalued upwards and the revaluation was recognised in other comprehensive income. In that case, the impairment loss is first offset against any related revaluation surplus in other comprehensive income, and any excess is recognised in profit or loss.

Reversal of Impairment Loss

UK GAAP allows for the reversal of impairment losses in certain circumstances if the reasons for the impairment have ceased to exist. However, the reversal cannot increase the carrying amount of the investment above the carrying amount that would have been determined had no impairment loss been recognised in prior years. Any reversal is recognised in profit or loss, unless it relates to an investment where the original impairment loss was recognised in other comprehensive income.

Disclosure

Companies are required to disclose information about impairment losses, including the amount of the loss, the line item in the statement of comprehensive income in which the loss is included, and the reasons for the impairment. They must also disclose information about reversals of impairment losses.

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