Investments form an important class of financial assets in corporate balance sheets, ranging from equity instruments and debentures to strategic long-term stakes in subsidiaries, associates and joint ventures. The value of these investments may fluctuate due to market forces, financial distress of the investee, or broader macro-economic changes. To ensure that the financial statements reflect a true and fair view, accounting standards require entities to evaluate whether their investments are impaired and to recognise losses when recoverable value falls below carrying value.
This article outlines the conceptual framework, triggers, valuation approaches, implications and reporting responsibilities relating to impairment of investments under both IGAAP-AS and Ind AS.
1. Understanding Impairment of Investments
Impairment represents a decline in the recoverable amount of an investment below its carrying value. The principle underpinning impairment is prudence — assets should not be overstated.
Applicability under Indian GAAP (AS 13)
- Current investments are measured at lower of cost or fair value.
- Long-term investments are measured at cost, but impairment is required when there is a decline other than temporary.
Applicability under Ind AS
- Financial instruments are governed by Ind AS 109- Financial instruments under which investments measured at fair value reflect changes through P&L/Other comprehensive income(OCI); no separate impairment test is needed.
- Investments in subsidiaries, associates and joint ventures carried at cost in the separate financial statements require an impairment assessment under Ind AS 36- Impairment of Assets.
2. When Should Impairment Testing Be Performed?
Trigger-Based Assessment (IGAAP – AS 13 Accounting for Investments): Impairment testing becomes necessary whenever internal or external indicators suggest that the recoverable amount may be lower than the carrying amount.
Common indicators include:
- Prolonged decline in market value
- Continuing operating losses of the investee
- Erosion of net worth or negative cash flows
- Regulatory or economic adversity affecting the investee
- Significant credit deterioration, defaults, or bankruptcy risks
- Evidence of fraud or adverse governance practices
There is no mandatory annual impairment test unless indicators exist
Annual Testing Requirement (Ind AS 36 – Impairment of Assets): For investments in subsidiaries, associates and JVs measured at cost, an annual impairment evaluation is generally expected even without explicit indicators.
3. Determining the Recoverable Amount
Recoverable amount is the higher of:
1. Value in Use (VIU) – Present value of expected future cash flows from the investment;
2. Fair Value Less Costs of Disposal (FVLCD) – Realisable value in a sale transaction after deducting selling costs.
Valuation Approaches Commonly Applied
Market Approach
- Quoted market prices
- Comparable company multiples (P/E, EV/EBITDA)
- Recent transaction pricing in similar sectors
Income Approach
- Discounted cash flow (DCF) valuation
- Dividend discount models
Asset Based Approach
- Net asset value (NAV)
- Liquidation value assessment (in distressed situations)
“Other-Than-Temporary” Decline (IGAAP-AS 13)
Indicators may include:
- Market value lower than cost continuously for 12+ months
- Deterioration in financial performance over multiple years
- Adverse industry developments
- Inability of investee to service liabilities
- Significant decline in business prospects or asset base
If such conditions persist, impairment is required.
4. Accounting and Presentation
Accounting Treatment under IGAAP-AS 13
- Impairment loss is charged to the Statement of Profit and Loss through a provision for diminution or reducing the value of investment. Investments are carried at cost of acquisition less provision for decline other than temporary in the value of such investment
- Reversals are permitted when the value is no longer impaired, subject to the investment not exceeding its original cost.
Accounting Treatment under Ind AS
- Investments measured at fair value reflect changes through OCI/P&L as per classification.
Example ; An entity acquires 10,000 equity shares of XYZ Ltd at ₹100 per share, aggregating to ₹10,00,000. As at the reporting date, the quoted market price declines to ₹85 per share, resulting in a fair value of ₹8,50,000. The resultant fair value loss of ₹1,50,000 is recognised directly in the Statement of Profit and Loss. Overall principle where investments are measured at fair value under Ind AS 109, any decline in value is captured through periodic fair valuation adjustments routed through profit or loss or OCI, as applicable.
- For investments at cost (subsidiaries/associates/JVs): Impairment loss is recognised in profit or loss. Reversal is generally allowed (except for goodwill-related impairments) where circumstances improve.
5. Governance and Audit Considerations
Impairment involves significant management judgement. Regulators and auditors therefore expect:
- Robust documentation of assumptions, valuation methodology and key inputs
- Board/Audit Committee oversight, particularly for large exposures
- Independent valuation reports where material
- Sensitivity analysis for key variables (growth rate, discount rate, terminal value)
- Compliance with disclosure norms under IGAAP-AS 13, Ind AS 36 and Ind AS 107
Under CARO 2020, auditors must comment on whether the terms of investments are prejudicial, requiring assessment of valuation.
6. Disclosure Requirements
Under IGAAP – AS
- Basis of valuation of investments
- Amount of provision recognised/reversed
- Market value of quoted investments
- Details of investments whose value has declined below cost
Under Ind AS
- Nature of asset and Cash generating unit(CGU) tested
- Key assumptions and valuation techniques
- Sensitivity analyses
- Impairment losses recognised and reversed
- Fair value hierarchy classification (Level 1/2/3)
7. Illustration
A company holds an equity investment in an unlisted entity at a carrying value of ₹12 crore. The investee has been incurring losses and its DCF valuation indicates a recoverable amount of ₹8.7 crore.
Impairment Loss = ₹12.0 crore – ₹8.7 crore = ₹3.3 crore
The loss is recognised in the P&L with disclosures on valuation methodology and assumptions.
8. Tax Implications – Allowability of Impairment / Diminution
General principle under the Income-tax Act, 1961 – Income-tax is levied on real income and not on notional or anticipated losses. Mere accounting provision or impairment in value of investments is ordinarily NOT allowable as a deduction. Loss is generally recognised for tax purposes only on actual realisation (sale, transfer, redemption or write-off)
Capital investments (held as capital assets)
Diminution / impairment in value of capital investments is NOT allowable. Provision made pursuant to IGAAP-AS 13 or Ind AS 36 does not result in a deductible expense.
Key ruling: ITAT Kolkata Bench ‘A’ ACIT v. Uniworth Textiles Ltd [2022] 140 taxmann.com 140 – Provision for diminution in value of investments is not an ascertained liability. Mere decline in value does not give rise to allowable business loss. Deduction allowed only on actual sale or when loss crystallises.
Investments held as stock-in-trade
Where investments are held as trading assets, diminution in value may be allowable. Valuation at cost or net realisable value (NRV), whichever is lower, is a recognised tax principle.
Key ruling: Chainrup Sampatram v. Commissioner of Income-tax [1953] 24 ITR 481 (SC) – held that valuation of stock-in-trade at cost or market value, whichever is lower, does not result in a notional loss but is an accepted principle of commercial accounting to determine true trading profits, and therefore the resulting diminution in value is allowable.
Conclusion
Impairment of investments is not merely a compliance requirement—it is a critical element of transparent financial reporting and prudent corporate governance. Timely identification of impairment indicators, rigorous valuation, and clear disclosures ensure that stakeholders receive an accurate picture of corporate financial health.
With increasing scrutiny from auditors and regulators, companies must adopt structured impairment assessment frameworks and maintain strong documentation to support their judgements.
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Disclaimer: The above information is intended for academic guidance and is to be used for informative purpose only. The said information is not to be considered as an opinion or advice. The aforesaid information is proprietary and privileged and is not to be used, reproduced and disclosed without consent. It is advisable to check with a subject matter expert before concluding on applicability or non-applicability of any compliance under any legislature. The views expressed are strictly personal.
The above article is written by Sachin Chaudhari and CA Shravan Suratwala. The authors can be reached at contact@smsuratwala.com or shravan.suratwala@outlook.com. Sachin Chaudhari is currently pursuing his Chartered Accountancy course and is completing his internship with S.M. Suratwala & Co., Chartered Accountants, Pune. Shravan Suratwala is a Partner at S.M. Suratwala & Co., Chartered Accountants, with over 10 years of post-qualification professional experience in advisory, litigation, and compliance across Corporate and International Taxation and Assurance, and has also spent more than three years in Internal and Process Audit during his Chartered Accountancy training.
