What indicates the impairment of a passive investment under amortized cost?

The indication of impairment for a passive investment under amortized cost is determined when the carrying value exceeds the present value (PV) of estimated future cash flows. This scenario suggests that the investment may not generate the expected future economic benefits, which leads to a reevaluation of its value on the balance sheet.

When the carrying amount of the investment is higher than the PV of future cash flows, it signals that the asset is overvalued, and thus, an impairment loss should be recognized. This assessment involves comparing the net investment's carrying amount with the discounted cash flows that are expected to be received. If the carrying amount cannot be recovered through future cash flows, an impairment loss is recorded in the financial statements, affecting both the balance sheet and the income statement.

Conversely, if the carrying value equals the PV of estimated future cash flows or if the PV is higher, it indicates that there is no impairment, and the investment retains its book value. Additionally, if an impairment is not recognized in profit and loss, it would not be a valid indication of impairment but rather reflects that the asset’s carrying value is appropriate given the expected cash flows. Thus, the correct identification of impairment hinges on the relationship between the carrying value and the PV of cash flows