Impairment Under IAS 39.pptx

AN OFFERING AT HIS LOTUS FEET

MASTER OF FINANCE25th August 2012

Triggering events for IMPAIRMENT under

IAS 39


Scope of Impairment Accounting

Three classes of financial assets viz.(i) Loans & receivables (L&R) or Held to Maturity (HTM) investments which are carried at amortized cost (ii) Financial assets carried at cost and(iii) Available for sale (AFS) financial assets


Identification

Must happen subsequent to the initial measurementMust happen before the end of the reporting periodObjective evidence of impairmentoccurrence should impact the estimated future

cash flowsLoss must be incurredMaterial and prolonged decline


Assessment of Impairment losses

Categorized into 2 types Individual Impairment Loss Assessment (IILA) Collective Impairment Loss Assessment (CILA).


Significant financial difficulty for borrowera breach of contract.granting to the borrower a concession that the lender would not otherwise consider, due to the borrower’s financial difficulties; becoming probable that the borrower will enter bankruptcy or other financial reorganization.the disappearance of an active market for that financial asset because of financial difficulties.if impairment triggers have not been identified on an individual basis, the asset must be assessed for impairment on a group basis.

Impairment triggering events:


Impairment for ‘financial assets carried at amortized cost’

Impairment loss = asset’s carrying amount - PV of estimated future cash flows (discounted at the asset’s original effective interest rate )


Impairment for ‘financial assets carried at cost’

Impairment loss = asset’s carrying amount - PV of estimated future cash flows (discounted at the current market rate of return for similar financial assets )


Impairment for ‘Available for sale’ financial assets

When there is objective evidence of impairment, the cumulative loss that has been recognized in the OCI will be Reclassified from equity to P&L

Example


Reversal of Impairment

For financial assets carried at amortized costFor financial assets Carried at costFor ‘Available for sale’ financial assets


References

Financial Accounting (A Managerial Perspective) By Narayanswamy Accounting standards & corporate accounting practices By T. P. Ghosh International Financial Reporting Standards By Hennie Van Greuning.www.ifrs.orgwww.iasplus.com

New International Accounting Concepts–Impairment Losses of Financial Assets Under IAS 39-Financial Instruments: Recognition and Measurement :The Chartered Accountant April 2007

THANK YOU

SAI RAM

Example - Decline in fair value but not impaired On 15.3.20X0 Entity A acquires equity instruments in a quoted company whose shares are actively traded. Cost is $800. The investment is classified as available-for-sale. On 31.03.20X0 (a quarterly reporting date) the quoted price indicates that the fair value has declined to $750. Entity A's management considers whether there is any objective evidence of impairment and determines that there is not. The decline in value is believed to result from short-term profit-taking and portfolio balancing by large institutional investors. Based on the facts and circumstances described, these equity investments are not impaired. The decline in fair value of $50 is reported in other comprehensive income and a debit balance of the same amount is included in the available-for-sale reserve component of equity.


Example - quarterly, half-yearly and annual assessment Entity D has a 31.12 annual reporting date and holds an AFS equity investment that originally cost $5,000. At 31.12.X1 the fair value has declined to $3,000 and an impairment loss of $2,000 is recognized in profit and loss. At 31.03.X2 the value has declined further to $2,500. At 30.06.X2 the value is $2,700. At 30.09.X2 and 31.12.X2 the value has recovered to $3,000. If Entity D reports (or assesses impairment) every quarter, it would record additional impairment losses in Q1 20X2 of $500, which cannot be reversed through profit or loss in subsequent quarters. If it reports (or assesses impairment) half-yearly, it recognizes an impairment loss in H1 20X2 of $300. If it reports annually and assesses impairment annually, no additional impairment loss is recognized in 20X2.

Documents

Impairment Under IAS 39.pptx