Testing impairment of an investment in a subsidiary in the standalone financial statements means applying Ind AS 36 directly to the investment as a single asset carried at cost — identifying impairment indicators specific to that subsidiary, estimating the investment's recoverable amount as the higher of its fair value less costs of disposal and its value in use, and comparing that recoverable amount to the carrying cost. This is distinct from, and does not automatically follow from, any impairment or consolidation adjustment made at the group level, because the standalone test looks at the investment the parent holds, not at the subsidiary's own balance sheet.
Why a loss-making subsidiary is an indicator, not an answer
A subsidiary that has made losses, or whose net asset value has fallen below the parent's cost of investment, is a strong indicator that impairment testing is required — but it is an indicator, not the test itself. The investment's recoverable amount depends on the subsidiary's future prospects, which can be stronger than its accumulated historical losses suggest, particularly for an early-stage subsidiary where losses were expected and funded in the business plan the parent approved when it invested.
The testing sequence
- 01Identify every investment in a subsidiary carried at cost in the standalone balance sheetConfirm the carrying amount for each is cost, not equity-accounted or fair valued, since the impairment approach below is specific to a cost-carried investment.
- 02Screen each investment for impairment indicatorsThe subsidiary's net asset value falling below the parent's cost of investment, the subsidiary making losses or a trend of declining results, a dividend from the subsidiary that exceeds its total comprehensive income for the period it relates to, or external indicators such as the subsidiary's sector deteriorating.
- 03For investments with an indicator, obtain the subsidiary's own cash flow forecastThe same forecast the subsidiary's own management uses, approved at an appropriate level, since the value-in-use calculation for the parent's investment is built from the subsidiary's expected future cash flows, typically expressed as expected dividends or ultimately as the subsidiary's own value as a going concern.
- 04Recompute the value in use or fair value less costs of disposal for the investmentDiscount the subsidiary's expected future cash flows, or the dividends expected to flow to the parent from them, at a rate reflecting the risks specific to the subsidiary and its market, not the parent's own cost of capital by default.
- 05Compare recoverable amount to the carrying cost and test the forecast's own reliabilityThe same scrutiny applied to any discounted cash flow estimate: compare this year's forecast to what the subsidiary actually achieved against last year's forecast, and challenge any growth or margin assumption inconsistent with recent performance.
- 06Reconcile the standalone conclusion against the group-level goodwill and CGU testing, without conflating the twoA different recoverable amount can validly arise at the standalone investment level and at the consolidated cash-generating unit level, because the inputs and what is being tested are not the same thing; document why, where the two conclusions diverge, rather than forcing them to agree.
- 07Test any impairment reversal in a later periodAn impairment loss recognised on an investment in a subsidiary can be reversed if the recoverable amount has genuinely recovered, up to the original cost; test the evidence for the recovery as rigorously as the evidence for the original impairment.
| Question | Evidence |
|---|---|
| Is there an impairment indicator | Subsidiary's net asset value, loss trend, dividend-versus-income comparison |
| What is the recoverable amount | Discounted cash flow forecast specific to the subsidiary, or an independent fair value |
| Does recoverable amount support the carrying cost | Comparison, with sensitivity to the key assumptions in the forecast |
| Is the forecast reliable | Comparison of last year's forecast to the subsidiary's actual results |
A dividend declared by the subsidiary out of pre-acquisition reserves, or that exceeds the subsidiary's total comprehensive income for the relevant period, is itself a specified indicator of impairment under Ind AS 36 and should trigger this procedure even where no other warning sign is present.
How we think about this
Comparing the recomputed recoverable amount to the carrying cost is arithmetic once the inputs are set. Building the discounted cash flow forecast for the subsidiary, and judging whether its assumptions are credible given its recent actual performance, is the same kind of estimate judgement as any other impairment test, and no shortcut from the consolidated numbers replaces doing it at the standalone level.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Audit documentationAuditing Ind AS 27 — testing the separate financial statements basisInd AS 27 is a short standard with one real audit question: which of the three permitted bases did management elect for investments, and is it actually the basis that was applied.
- Fixed assets & capexAuditing Ind AS 36 — CGU identification and recoverable amount testingInd AS 36 impairment lives or dies on one question answered first: what is the cash-generating unit. Get that wrong and the recoverable amount calculation that follows is irrelevant.
- Fixed assets & capexHow to test goodwill for impairment at the CGU levelConfirm the CGU allocation goes back to the acquisition itself, test the recoverable amount model built for each unit, and check the impairment loss was allocated in the right sequence.
- Audit workflow & automationSA 540: auditing accounting estimates, where judgment replaces a verifiable numberAn estimate can't be vouched to a source document the way an invoice can. SA 540 is about what replaces vouching when there's no single right answer to check against.
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