Impairment Assessment for Equity Investment

Hard Intercorporate Investments Impairment Of Investments

ABC Ltd. owns a 30% equity investment in XYZ Inc. that was initially purchased for $5 million. During the year, XYZ Inc. faces significant operational challenges, leading to a decline in its market capitalization. After assessing the situation, ABC Ltd. determines that the fair value of its investment in XYZ Inc. is now $3 million. ABC Ltd. has not made any cash distributions from XYZ Inc. that would affect the carrying amount. According to the relevant accounting standards, ABC Ltd. must assess whether the investment is impaired.

Which of the following statements regarding the impairment of ABC Ltd.'s investment in XYZ Inc. is accurate?

ABC Ltd. should recognize an impairment loss of $2 million in its income statement.

ABC Ltd. can carry the investment at its original cost if it believes the decline in fair value is temporary.

Impairment loss can only be recognized if there are cash flows that are expected to decrease.

Hint

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