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(Solution) Investment adjustment required under IFRS

Investment adjustment required under IFRS

Munich Corporation owns a 30% equity interest in Cologne Inc. The carrying value of the investment at year end was €75 million and the fair value, less selling costs, was €62 million. The present value of the future expected cash flows is €65 million. What adjustment, if any, is required under IFRS in presenting the investment in Munich’s year ended income statement if a significant legal development caused the decline in value?
a. A €10 million impairment loss is recognized.
b. A €13 million impairment loss is recognized.
c. No adjustment is necessary.

See also: (Solved) What amount of goodwill is created on acquisition

Solution

To determine the necessary adjustment for Munich Corporation’s investment in Cologne Inc. under IFRS, we need to analyze the carrying value, fair value, and present value of future expected cash flows, particularly in light of the significant legal development that caused a decline in value.

Given Information

  • Carrying Value of Investment: €75 million Correct
  • Fair Value (less selling costs): €62 million Correct
  • Present Value of Future Expected Cash Flows: €65 million Correct

Step 1: Assessing Recoverable Amount

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