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IFRS Accounting for impairment of financial assets

IFRS Accounting for impairment of financial assets

IFRS Accounting for impairment of financial assets: A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of a past event that occurred subsequent to the initial recognition of the asset. Expected losses as a result of future events, no matter how likely, are not recognised.

IFRS Accounting for impairment of financial assets

An entity assesses at each balance sheet date whether there is objective evidence that a financial asset or group of assets may be impaired.

The disappearance of an active market or the downgrade of an entity’s credit rating is not itself evidence of impairment, although it may be evidence of impairment when considered with other information. A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also objective evidence of  impairment.

IFRS Accounting for impairment of financial assets

If there is objective evidence that impairment has been incurred and the carrying amount of a financial asset carried at amortised cost exceeds its estimated recoverable amount, the asset is impaired. The recoverable amount is the present value of the expected future cash flows discounted at the instrument’s original effective interest rate. The use of this rate prevents a market value approach from being imposed for loans and receivables. The carrying amount is reduced to its recoverable amount either directly or through the use of an allowance account. The amount of the loss is included in net profit or loss for the  period.

IFRS Accounting for impairment of financial assets

If there is objective evidence of impairment of available-for-sale financial assets carried at fair value, the cumulative net loss (difference between amortised acquisition cost and current fair value less any impairment loss previously recognised in the income statement) that has previously been recognised in equity is removed and recognised in the income statement, even though the asset has not been sold. Entities are prohibited from reversing impairments on investments in equity securities. However, if the fair value of an available-for-sale debt instrument increases and the increase can be objectively related to an event occurring after the loss was recognised, the loss may be reversed through the income statement.

IFRS Accounting for impairment of financial assets

For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (for example, on the basis of a credit risk evaluation or grading process that considers asset type, industry, geographical location, collateral  type,

past-due status and other relevant factors). Those characteristics should be relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’  ability to pay all amounts due according to the contractual terms of the assets being   evaluated.

IFRS Accounting for impairment of financial assets

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist  currently.

IFRS Accounting for impairment of financial assets

Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (such as changes in unemployment rates, property prices, payment status and other factors indicative of changes in the probability of losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

IFRS Accounting for impairment of financial assetsStop press – fair value measurement

The IASB published an exposure draft on fair value measurement of financial instruments in May 2009. The main tentative decisions that the Board has made to date in the fair value measurement ED are:

  • Scope exclusion: the Board decided to exclude of IAS 39 paragraph 49 from the scope of the ED on fair value measurement. This paragraph describes the measurement objective for a financial liability with a demand
  • Definition of fair value: the Board tentatively decided to define fair value as ‘the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date’. It also decided that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the most advantageous market for the asset or
  • Fair value disclosures: the proposed disclosures are similar to disclosure requirements for financial
  • Unit of account: the Board confirmed that the measurement objective should be to measure fair value at the individual instrument It decided: (a) to exclude blockage factors from a fair value measurement at all levels of the fair value hierarchy; and (b) that a fair value measurement should exclude other discounts or premiums (such as a control premium) that apply to a holding of financial instruments and do not apply to the individual instrument.
  • Day-one gain or losses: the Board reaffirmed that the transaction price is the best evidence of fair value at initial recognition except in the cases of related parties, duress, different units of account or different markets. If the transaction price does not represent fair value of a financial instrument at initial recognition, an entity recognises the resulting day-one gain or loss when required by the existing criteria in IAS 39. Any deferred gain or loss is a separate item, not part of the fair value. The Board tentatively decided in January that day-one gains or losses should not be recognised for financial instruments measured on a basis other than fair value through profit or loss. To avoid changes to IAS 39 that are beyond the scope of this project, the Board withdrew that
  • Fair value of liabilities: the Board confirmed that the fair value of a liability reflects non- performance risk (including credit standing).
  • Application guidance: on determining fair value in illiquid markets will also be included, based on FASB FSP 157-4.

The IASB also decided tentatively that its forthcoming ED on fair value measurement would propose additional disclosure requirements about fair value for interim financial reports to ensure consistency with US GAAP, as follows:

  • For financial instruments measured at fair value, the same disclosures as the ED would propose in annual financial
  • For financial instruments not measured at fair value:
    • The fair value of financial instruments, as already required in annual financial statements by IFRS
    • The same disclosures as the ED would propose in annual financial

For non-financial assets and non-financial liabilities, no additional specific requirements beyond the existing disclosure requirements in IAS 34

IFRS Accounting for impairment of financial assets

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