IFRS The causes of impairment
IFRS The causes of impairment: These are the reasons for possible reasons for the the cause of impairment
1. IFRS The causes of impairment: Identify whether a “significant or prolonged” decline in the fair value of an equity investment has occurred at the balance sheet date. If so, recognition of an
impairment loss in net income is mandatory. IAS 39 also says that loss recognition is appropriate if other objective evidence of impairment exists, e.g. if significant changes with an adverse effect have taken place in the technological, market, economic or legal environment in which the issuer operates and indicates that the cost of the investment may not be recovered. We would normally expect that such information would be reflected in fair value assessments.
2.IFRS The causes of impairment: Make assessments whether a decline in fair value is significant or prolonged at the level of the individual security.
Evaluating impairment on a portfolio basis is not appropriate. Where a security has been acquired at different dates and prices, the weighted average cost method, first-in-first-out method or specific identification method can be used to assess impairment, as long as the method is consistently applied for both the assessment of impairment and the determination of realised gains or losses upon disposal.
3. IFRS The causes of impairment: Use judgement in evaluating whether a decline in fair value is significant or prolonged.
The IFRS Interpretations Committee (“IFRIC”) has emphasised that it is necessary to apply judgement even if an entity has developed internal guidance to assist it in its impairment evaluations. Whether a decline is significant should be judged relative to the original cost of an investment. Whether it is prolonged should be judged by considering the period an investment has been underwater. Share price volatility over an extended period is a factor that an entity might consider in its assessments, but this requires complex statistical modelling
- Resist the temptation to defer recognition of an impairment loss until a decline is both significant and prolonged. The IFRIC has confirmed this interpretation of IAS 39 is
- Reject explanations that a decline in fair value is not significant or prolonged because it is attributable to general market conditions or expected to reverse. The IFRIC has emphasized that a decline in the value of an investment in line with the overall level of decline in the relevant market does not mean that the investment is unimpaired.
- Forget about evaluating whether a decline in fair value is “other than temporary”, or whether the entity has the intent and ability to hold the investment until recovery occurs. These are old Canadian GAAP and US GAAP criteria, not
- Recognise an impairment loss even if the only reason for the loss is an adverse movement in foreign exchange rates.
IFRS The causes of impairment: Evaluation of impairment is relative to the functional currency of the entity undertaking the evaluation and therefore a decline in the exchange rate can lead to the recognition of an impairment even if the fair value of the security has increased in the foreign currency. For example, an entity with a Canadian dollar functional currency holding an investment that can only be realised in US dollars should translate the US dollar investment at the current exchange rate and recognise an impairment if there is a decline in fair value in Canadian dollars that is significant or prolonged.
- Measure the impairment loss as the difference between the acquisition cost and the current fair value of the investment, less any impairment loss recognised in an earlier period. If all or a portion of a decline in fair value has occurred in the current period, we believe the entity has the choice of recognising the decline first in OCI and then transferring it to net income, or recognising the loss directly in the income statement and bypassing OCI. For example, if there is a fair value decline sitting in accumulated other comprehensive income of $100 at the start of the period and a further loss of $150 in the period, the entity could either recognise the loss of $150 in OCI for the period and present a reclassification adjustment of $250, or show a reclassification adjustment of only $100 and recognise the $150 directly in net income. This is a matter of accounting
- Do not reverse impairment losses if the fair value of an equity investment subsequently recovers. This is prohibited by IAS 69.
- Do not use the carrying amount after the impairment as a basis against which to assess any further declines in value for impairment. Instead, any further declines in the fair value of a security after an impairment loss are automatically considered to be further impairments to be recognised in net
- Consider whether the judgements made in respect of impairment assessments represent “critical judgements” requiring disclosure. IAS 122 requires an entity to disclose the judgements that have had “the most significant effect on the amounts recognised in the financial statements”. Disclosure of the reasons for the judgement is necessary, especially if an entity has determined that a decline in fair value is not significant or prolonged.