272 / 488
Chapter
25 /
Financial Instruments: Recogn ition and Measurement (lAS 39)
263
327
4,673
Aft er this, the balance sheet will show an asset fo r the loan of
$4,673.
lAS
39
requires accrual of interest on impaired loans and receivab les at the origina l effective inte r–
est rate. In this case, therefore, Entity
A
would accrue interest at
7%
on the beg inning carrying
amo unt of
$4,673
(i.e.,
$327
dur ing 20 /0). Assuming the expectations at the beg inning of the year
turn out
to
be accurate, Entity
A
would make these entries at the end ofyear 20 I0:
Dr Cash
5,000
Cr Interest income
Cr
Loans and receivables
6.3.7
For individually significant loans and receiv ables and held-t o-maturit y investments, an en–
tity first assesses whethe r any objec tive evidence of impairment exists at the individual asse t level.
If no objective evidence of impairment exists for an individual asse t, the ent ity groups the assessed
asset together with other assets that have similar credit-risk characteristics.
It
then assesses whether
any objective evidence of impairment exists at the group level. Th is two-step approac h of first as–
sessing at an individual level and then at a group level applies because impairment that does not yet
meet the threshold for recognition when an individual asset is assessed may be ev ident when that
asset is grouped with other similar financial assets (i.e., losses have been incurred but not yet been
reported at the individual asset level).
6.3.8
For loans and recei vables and held-to-maturity investments that are not indi vidually signifi–
cant, an entity has a choice whether to do an individual evaluation of specific financ ial asse ts or a
collective evaluation of groups with similar credit-ri sk charac teristics. Irrespective of whether it
make s an individual evaluation, an entity is required to do an assess ment at the group level for as–
sets that have not been individuall y identified as impaired.
Example
An entity may observe that there is an increased numbe r of late payments in a group of mortgage
loans that have not been individually identified as impaired. Based on these data, the entity may de –
termine that it has objective evidence of impairment because its past expe rience indicates that an in–
crease in the number of late payments results in a measurable decrease in the estimated fut ure cash
fl ows in the group. In this case, the entity should measure any resultin g impairment loss based on
historical loss experience for assets with similar credit-risk chara cteristics adjusted,
if
necessary,
for changes in condi tions that affect losses.
6.3.9
For available-far-sale financia l assets, impaired assets continue to be measured at fair value.
Any unrealized holding losses that had previously been recognized as a separa te component of eq–
uity are removed from equit y and recognized as an impairment loss in profit or loss.
Example
Ass ume
En tity
A
has an investment in a debt security that it has classified as avai lable for sale and
that it had initially acquired for $/00,000. Due
to
a decrease in fair value, the current carrying
amount of the investment is $80, 100 and Entity
A
has an unrealized holding loss of
$19,
900 recog–
nized as a separa te component of equity. (An unrealized holding loss on an ava ilable-for-sale fina n–
cial asset would be included in equ ity as a debit, so
it
is presented as an item with a negative
balance of $19,900 in
equity.)
Due to significant financial diffic ulties of Entity
A,
the debt sec urity
has been downgraded by the rating agencies, and
it
appea rs likely that the issuer of the debt
security will not be able
to
repay all principal and interest on the bond. Therefore, Entity
A
determines that there is objec tive evidence of impairment equa l
to
the unreali zed holding loss
pr eviously recorded in equity. In this case,
Entity
A
would make these entries:
Dr Impairment loss
19,900
Cr Equity
19,900
Af ter this, the balance sheet will still show an asset of $80,100, but the amo unt of the unrealized
holding loss that had previously been deferred in equity would
flOW
have been recogn ized as an im–
pairment loss in profit or loss.
6.3.10
For investments in unquoted equ ity instruments that canno t be relia bly meas ured at fair
value, impaired assets are measured at the present value of the estimated future cash flows dis–
counted using the current market rate of return for a similar financi al asset. Any differ ence between
the previous carrying amount and the new measurement of the impaired asse t is recognized as an
impa irment loss in profit or loss.