IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 25 / Financial Instruments: Recognition and Measurement (lAS 39)

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6.3.13

Summary

Would impairment losses ever be reversed through profit or loss while the impaired asset is still held? Yes, if the amount of the impairment loss decreases and the decrease can be objectively related to an event occurring after impairment was recognized Yes, if the amount of the impairment loss decreases and the decrease can be objectively related to an event occurring after impairment was recognized Yes, if the amount of the impairment loss decreases and the decrease can be objectively related to an event occurring after impairment was recognized No

At what amount are impaired assets measured in the balance sheet? Present value of es– timated future cash flows discounted using the original effective interest rate Present value of es– timated future cash flows discounted using the original effective interest rate

What is the amount ofthe impairm ent loss recognized in pro fit or loss ? The difference between the previous carrying amount and the new carrying amount

Categories of financial assets

Loans and receivables

The difference between the previous carrying amount and the new carrying amount

Held-to-maturity investments

Available-for-sale financial assets: investments in debt instruments

Fair value

The amount of unrealized holding losses previously recognized directly in equity

Available-for-sale financial assets: investments in equity instruments Investments in unquoted equity instruments that cannot be reliably measured at fair value

Fair value

The amount of unrealized holding losses previously recognized directly in equity The difference between the previous carrying amount and the new carrying amount

Present value of es– timated future cash flows discounted using the current market rate of return for a similar financial asset

No

Case Study 11

This case illustrates how to account fo r impairment of loans and receivables. Facts

Entity A has a loan asset whos e init ial ca rry ing amount is $ 100,000 and wh ose effective interest rate is 8%. On January I, 20X5, Entity A determines that the borrower will probably enter into bankruptcy, and ex pec ts to co llec t only $20,000 of remaining principal and interest cash flows. Entity A ex pects to recover this amo unt at the end of 20X5. Required Determ ine the amount that Enti ty A should record as an imp airment loss du ring 20X5 and the amo unt of interest income that would be reported durin g 20X5, if any . Solution On January I , 20X5, Entity A should recogn ize an impa irment los s of $8 1,48 1. The present value of the estimated future cash flows is $18,519 (= $20,000 / 1.08). The difference between the previ ou s carrying amount of the asset ($100,000) and the present value of the estimated future cash flows ($ 18,5 19) is $8 1,48 1. The journal entry is Dr Impairment loss 81,481 Cr Loans and receivables 81,481 Du ring 20X5, Entity A sho uld recogni ze inte rest incom e of $ 1,48 1. This is co mputed by multiplyin g the orig ina l effective interest rate with the carrying amount (= 8% x 18,519). The journal entry is Dr Loans and receivables $1,481 Cr Interest income $ I,48I