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Chapter
25 /
Financial Instruments: Recognition and Measurement (lAS 39)
6.3.13
Summary
265
Categories of
financial assets
Loans and
receivables
Held-to-maturity
investments
Available-for-sale
financial assets:
investments in debt
instruments
Available-for-sale
financial assets:
investments in
equity instruments
Investments in
unquoted equity
instruments that
cannot be reliably
measured at fair
value
Case Study 11
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
Fair value
Fair value
Present value of es–
timated future cash
flows discounted using
the
current
market rate
of return for a similar
financial asset
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
The difference between the
previous carrying amount and
the new carrying amount
The amount of unrealized
holding losses previously
recognized directly in equity
The amount of unrealized
holding losses previously
recognized directly in equity
The difference between the
previous carrying amount and
the new carrying amount
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
No
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