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Impairment Test of foreign Subsidiary
02-24-2010, 01:44 AM
Post: #1
Impairment Test of foreign Subsidiary
There is an entity in Pakistan which has a wholly owned subsidiary in foreign.
Parent entity invested about 500,000 Euros five years back.
Uptill last year subsidiary had Accumulated losses of 639,000 Euros.. Auditors of the company proposed for impairment but did not made any as positive Cash projections were provided.

This year though Company met with projections, but still that subsidiary has Accumulated losses of almost 587,000 Euros.

Will anybody help me that should we charge impairment or not, and can we rely on projections. Further if we are to charge impairment that how should we calculate it.

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02-24-2010, 05:45 AM
Post: #2
Dear Noor

Are you asking about separate financials or consolidated ones?

I guess it is about separate financials since query does not as such make much sense if consolidated ones are focused.

In separate financials, in my view, if you have well drafted projections of positive cash flows that can erode the debit balance of equity by generating similar amounts of profits, you may not consider "impairment" imperative. Specially where projections have been met until now.

I would however like to recommend that you should prepare a realistic and complete financial model (must be with terminal value; say at the end of 20 years) and calculate adjusted cash flow based valuation ie PV of future adjusted cash flows. Weighted average cost of capital of the "project" ie subsidiary should be used to discount cash flows. However, with holding company's perspective you may apply its own weighted average cost of capital.

This will be a value in use.

You can compare such PV with the carrying amount to take a well informed decision regarding impairment.

If subsidiary is listed, you can take higher of

- value in use; and
- fair value (as per listed rates)

And can compare such higher figure with carrying amount to find out "impairment".

Projections of positive cash flow are a preliminary assessment tool. For going in depth you have to apply IAS 36 in essense.

Please note, you can use simple annual cash flows instead of adjusted cash flows if like doing so. However, discount rate should be very realistic.

I hope this will help.


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