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What categories of financial assets can be impaired?
All financial assets are subject to impairment testing
under IAS 39R unless they are specifically excluded
from its scope, or are carried at fair value with
changes recognised in the income statement [IAS39R.2].
All categories of financial assets other than those
at fair value through profit and loss - that is,
loans and receivables, held-to-maturity and available-for-sale
assets - are subject to review for impairment. The
impairment provisions of IAS 39R also apply to finance
lease receivables.
Objective evidence of loss events
Impairment testing is required when objective evidence
of loss events are present. Certain factors are
identified in the standard as indicators of impairment;
this is not an exhaustive list. These factors include
[IAS39R.59]:
| a) |
the significant
financial difficulty of the issuer ; |
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| b) |
a breach of contract such as a default
or delinquency in payment of interest or principal; |
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| c) |
the lender, for economic or
legal reasons relating to the borrower's financial
difficulty, granting to the borrower a concession
that the lender would not otherwise consider
; |
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| d) |
it becoming probable that the
borrower will enter bankruptcy or other financial
reorganisation; |
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| e) |
the disappearance of an active
market because of financial difficulties ; |
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| f) |
observable data indicating
that there is a measurable decrease in the estimated
future cash flows from a group of financial
assets since the initial recognition of those
assets, although the decrease cannot yet be
identified with the individual financial assets
in the group including: adverse changes in the
payment status of the borrowers, or national
or local economic conditions that correlate
with defaults on the assets in the group . |
Most of these loss events relate to impairment
of debt instruments whether they are classified
as loans and receivables, held-to-maturity or AFS.
The holders of an equity instrument have only a
residual interest in an entity's assets, and rank
after all of the creditors. Thus an equity security,
conceptually, is likely to impair before a debt
security.
Indicators of impairment specific to equity securities
are:
| a) |
a prolonged period
where fair value remains substantially below
cost ; |
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| b) |
a significant decline in the fair value
below cost [IAS39R.61]; or |
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| c) |
significant changes with an
adverse effect that have taken place in the
technological, market, economic or legal environment
in which the issuer operates and indicate that
the cost of the investment in the equity instrument
may not be recovered. |
Measurement of impairment
The measurement of impairment and the recording
of the impairment charge will depend on the classification
and accounting for the financial asset [IAS39R.55-57].
Assets at amortised cost
The asset's carrying value is compared to the estimated
recoverable amount and the difference is recorded
in the income statement as the impairment charge
[IAS39R.63].
The estimated recoverable amount is the net present
value of the future cash flows (principal and interest)
expected from the asset, discounted using the original
effective interest rate of the instrument [IAS39R.63]
. . Collateral must
be taken into account when determining an asset's
expected future cash flows [IAS39R.AG84]. This methodology
for assessing impairment must be applied to both
accounts receivable and loan portfolios. Thus the
traditional provisioning matrix used by banks and
most corporate entities will no longer be appropriate
[IAS39R.IG.E.4.5]. IFRS specifically prohibits general
provisions against non-specific risks [IAS39R.IG.E.4.6].
The timing of expected future cash flows, including
the proceeds of any collateral, is crucial both
in determining if impairment exists and measuring
any impairment. Thus impairment has occurred, even
if an entity expects to collect all interest and
principal payments due, where the timing of payments
is expected to be delayed without full compensation
for the delay calculated at the original effective
interest rate for the asset [IAS39R.63].
Use of the original effective interest rate ensures
that interest-rate based fair value elements are
not introduced into the measurement of assets that
are carried at amortised cost. However as a practical
expedient, impairment of interest bearing financial
assets may be measured on the basis of the instrument's
fair value using an observable market price [IAS39R.AG84].
The carrying amount of the asset shall be reduced
either directly or through the use of an allowance
account. The amount of the impairment loss shall
be recognised in profit or loss [IAS39R.63].
Asset versus portfolio basis impairment
Individually significant financial assets must
be tested for impairment if there are indicators
of impairment. Impairment is measured on a portfolio
basis when there is indication of impairment in
a group of similar assets and impairment cannot
be identified with an individual asset within the
group [IAS39R.64]. An asset that is deemed impaired
on an individual basis cannot subsequently be included
in any group of assets that is tested for impairment
on a portfolio basis [IAS39R.64].
Recognition of interest income on impaired
assets
Once a financial asset has been written down as
a result of an impairment loss, interest income
is recognised thereafter based on the rate of interest
that was used to discount the future cash flows
for the purpose of measuring the impairment loss
[IAS39R.AG93]. Thus, interest income will be recognised
on financial assets that are classified as 'non-performing.'
Available for sale financial assets
When a decline in the fair value of an available
for sale financial asset has been recognised directly
in equity and there is objective evidence that the
asset is impaired, the cumulative loss that has
been recognised directly in equity shall be removed
from equity and recognised in profit or loss [IAS39R.67] . Any subsequent losses on equity
investments are also recognised in profit or loss
until the asset is derecognised [IAS39R.IG.E.4.9].
Judgement must be used in determining whether there
is objective evidence of impairment when assets
are merely subject to ordinary fluctuations in fair
value. The specific impairment indicators above
for equity investments are useful in making such
decisions along with consideration of the normal
volatility in the fair value of an equity investment.
Crucial to the evaluation of impairment is the length
of time that fair value has been below acquisition
price, or the significance of that decline in fair
value below acquisition price [IAS39R.61].
Assets carried at cost
Any assets that are not carried at fair value because
fair value cannot be reliably measured should be
reviewed at the balance sheet date for impairment
if impairment indicators are present . Impairment is measured as
the difference between the carrying amount and the
present value of expected future cash flows discounted
at the current market rate of interest for a similar
financial asset. The impairment should be recorded
in the income statement [IAS39R.66].
Subsequent reversal of impairment
Financial Assets at amortised cost
Impairments recorded on assets carried at amortised
cost may be reversed in subsequent periods if specific
criteria are met. An impairment charge can be reversed
if [IAS39R.65]:
| a) |
the impairment
decreases (that is, the present value of the
expected future cash flows increases); and |
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| b) |
the decrease can be related objectively
to an event occurring after the impairment
was recognised. |
The reversal of the impairment shall not result
in the financial asset being carried at a value
in excess of what the amortised cost would have
been at the date the impairment is reversed. The
reversal is recognised in profit or loss.
Available for Sale Financial Assets
Reversals of impairments on available for sale debt
securities are treated in a similar way as those
for assets carried at amortised cost. The impairment
is reversed if the fair value or recoverable amount
increases and the increase can be related to an
observable event occurring after the impairment
loss was recognised. The reversal of impairment,
up to the value originally recognised, is recorded
in the income statement [IAS39R.70].
Impairment losses recognised in profit or loss
for an available for sale equity security cannot
be reversed through profit or loss [IAS39R.69].
Presentation
Impairment losses should be presented as a component
of the relevant category of expense. For example,
impairment of loans and any accrued interest will
form part of bad debt expense.
Disclosures
Entities should disclose information about the fair
value of financial assets and the policy for recognising
changes in fair value [IAS32R.61] [IAS32R.92] and
make disclosures specific to impairment:
| a) |
the amount of interest
income accrued on impaired financial assets
[IAS32R.94(h)(iii)];
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| b) |
the nature and amount of any impairment
loss recognised in profit or loss for a financial
asset, separately for each significant class
of financial assets [IAS32R.94(i)]. |
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