Impairment Of AFS Equity Instruments Under IFRS - Key Reminders For Year-End


Given the continuing economic uncertainties and market volatility, we expect that assessing investments in AFS equity instruments for impairment will be a significant issue for companies holding these investments at year end. In this memorandum, we provide key reminders for complying with the impairment requirements in IAS 39, Financial Instruments: Recognition and Measurement.ant or prolong, recognize impairment in net income.

  1. Identify whether a "significant or prolonged" decline in the fair value of an equity investment has occurred at the balance sheet date. If so, recognition of animpairment loss in net income is mandatory.IAS 39 also says that loss recognition isappropriate if other objective evidence ofimpairment exists, e.g. if significant changeswith an adverse effect have taken place inthe technological, market, economic or legalenvironment in which the issuer operatesand indicates that the cost of the investmentmay not be recovered. We would normallyexpect that such information would bereflected in fair value assessments.

  2. Make assessments whether a decline in fair value is significant or prolonged at the level of the individual security. Evaluating impairment on a portfolio basisis not appropriate. Where a security hasbeen acquired at different dates and prices,the weighted average cost method, first-infirst-out method or specific identificationmethod can be used to assess impairment,as long as the method is consistently appliedfor both the assessment of impairment andthe determination of realized gains or lossesupon disposal.

  3. Use judgment in evaluating whether a decline in fair value is significant or prolonged. The IFRS InterpretationsCommittee ("IFRIC") has emphasized thatit is necessary to apply judgment even ifan entity has developed internal guidanceto assist it in its impairment evaluations.Whether a decline is significant should bejudged relative to the original cost of aninvestment. Whether it is prolonged shouldbe judged by considering the period aninvestment has been underwater. Shareprice volatility over an extended period isa factor that an entity might consider inits assessments, but this requires complexstatistical modelling.

  4. Resist the temptation to defer recognition of an impairment loss until a decline is both significant and prolonged. The IFRIC has confirmed this interpretationof IAS 39 is inappropriate.

  5. Reject explanations that a decline in fair value is not significant or prolonged because it is...

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