When and how do you impair an equity method investment, and is the write-down reversible?

Equity method impairment is a testable area precisely because of the IFRS vs. GAAP divergence. Here is the full picture.

When to Impair

Under both frameworks, you impair when there is objective evidence that the investment's recoverable amount (IFRS) or fair value (US GAAP) has declined below the carrying amount and the decline is other-than-temporary.

Triggers include:

• Significant financial difficulty of the investee
• A major adverse legal ruling (like Meridian's patent loss)
• Sustained losses with no recovery plan
• Severe technology obsolescence

How to Record — Drexford's Example

Carrying amount: $180M. Fair value:$110M.

Impairment loss = $180M -$110M = $70M

Journal entry:

• DR: Impairment loss (income statement) — $70M
• CR: Investment in Meridian Labs — $70M

The investment is now carried at $110M.

IFRS vs. US GAAP on Reversals

Feature	US GAAP	IFRS
Impairment model	Other-than-temporary	IAS 36 / IAS 28
Write-down to	Fair value	Recoverable amount
Reversal allowed?	No	Yes, up to original carrying amount

This is a classic exam trap. Under US GAAP, once you write down an equity method investment, you never reverse it even if fair value recovers. Under IFRS, if conditions improve, you can reverse the impairment (but only up to what the carrying amount would have been without the impairment).

Post-Impairment Equity Pickup

After the write-down, Drexford continues applying the equity method using the new $110M base. If Meridian earns$20M next year, Drexford picks up 30% x $20M =$6M, and the amortization schedule for any remaining excess purchase price continues from the reduced base.

Exam tip: If a vignette describes significant adverse events and asks for the income statement impact, remember the impairment loss is a separate line item — it does not get netted against equity method income.

Practice more impairment scenarios in our CFA Level II question bank.