IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley IFRS: Practical Implementation Guide and Workbook

(d) It becomes probable that the borrower will enter bankruptcy or other financial reorganiza–

tion

(e) The disappearance of an active market for that financial asset because of financial difficul–

ties

(f)

Observable data indicating that there is a measurable decreas e in the estimated future cash

flows from a group of financial assets since the initial recognit ion of those assets , although

the decrease cannot yet be identified with the individual financial assets in the group (i.e., a

loss that is incurred but not yet reported) . Such data may include changes in unemployment

rates or property prices that affect borrowers in a group.

6.3.2 For investments in equity instruments that are classified as available for sale, a significant

or prolonged decline in the fair value below its cost is also objective evidence of impairment.

Practical Insight

lAS 39 does ,not provide any bright line or rule of thumb to determine what constitutes a sig–

nificant or prolonged decline in the fair value below its cost. This is a matter of judgement.

6.3.3 If any objective evidence of impairment exists, the entity recognizes any associated im–

pairment loss in profit or loss. Only losses that have been

incurred

can be reported as impairment

losses. This means that losses expected from future events, no matter how likely, are not recog–

nized. A loss is incurred only if both of these two conditions are met:

(I )

There is objective evidence of impairment as a result of one or more events that occurred

after the initial recognit ion of the asset (a "loss event" ),

and

(2) The loss event has an impact on the estimated future cash flows of the financial asset or

group of financial assets that can be reliably estimated.

6.3.4 The impairment requirements apply to these types of financial assets:

• Loans and receivables

• Held-to-maturity investments

• Available-for-sale financial assets

• Investments in unquoted equity instruments whose fair value cannot be reliably measured

6.3.5 The only category of financial assets that is not subject to testing for impairment is financial

assets at fair value through profit or loss, because any declines in value for such assets are recog–

nized immed iately in profit or loss irrespect ive of whether there is any objective evidence of im–

pairment. Financial liabilities are not subject to testing for impairment.

6.3.6 For loans and receivable s and held-to-maturity investments, impaired assets are measured at

the present value of the estimated future cash flows discounted using the original effective interest

rate of the financi al assets (i.e., the effective interest rate that is used to determine amortized cost).

Any difference between the previous carrying amount and the new measurement of the impaired

asset is recognized as an impairment loss in profit or loss. This would be the case if the estimated

future cash flows have decreased.

Example

Assume Entity

at the beginnin g of 2006 originates a fiv e-year loan f or $ ID, OOO that has a stated

interest rate of

to be recei ved at the end of each year and a principal amount of $10,000 to be

received at maturity. The original effec tive interest rate is also

7%.

At the beginning of2010, Entity

determines that there is objective evidence of impairment due to significant finan cial difficulties of

the borrower and estimates that remaining estimated f uture cash fl ows are $5,000 instead of

$ID,700 (i.e., interest fo r 20ID of $700 and principal of $ID,OOO). In this case, Entity

measures

the impaired asset at the beginning of 2010 at the present value of the estimated future cash fl ows

discounted using the original effective interest rate. Inserting the actual amounts gives $5,000 dis–

counted for one year at

7%,

or 5,000 /1,07, which results in a present value of

$4,673.

Accordingly,

the impairment loss to be recognized at the beginning of 2010 equals

$5,327

10,000

4,673).

Entity

reduces the asset directly rather than through an allowance account, it would make this

journal entry:

Dr Impairment loss

5,327

Cr Loans and receivables

5,327