Page 11 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2

READING 14: INTERCORPORATE INVESTMENTS
Impairment of Financial Assets
If recoverable value (RV) < carrying value (CV) and is
expected to remain so! MODULE 14.3: FINANCIAL ASSETS, PART 2—IMPAIRMENTS, RECLASSIFICATIONS

IFRS and U.S. GAAP require that held-to-maturity (HTM) and available-for-sale (AFS) securities be evaluated for impairment at each
reporting period. Not necessary for ‘’held-for-trading’’ and ‘’designated at fair value securities’’ as declines in their values are recognized
on the income statement as and when!

U.S. GAAP
Security considered impaired if its decline in value is other than temporary. For both HTM and AFS securities, the write-down to fair value
is treated as a realized loss (i.e., recognized on the income statement).

U.S. GAAP—Reversals
A subsequent reversal of impairment losses is not allowed.

IFRS
Impairment if at least one loss event has occurred, and Equities:
its effect on the security’s future cash flows can be A loss event has occurred if the FV has experienced a substantial or
estimated reliably. extended decline below its carrying value or if changes in the business
environment facing the equity issuer (such as economic, legal, or
Losses due to occurrences of future events (regardless technological developments) have made it unlikely that the value of the
of the probability of occurrence) are not recognized. equity will recover to its initial cost.

If a HTM security has become impaired, its CV is decreased to the
Debt securities: present value of its estimated future cash flows, using the same effective
Loss events can include default on payments of interest interest rate that was used when the security was purchased. This may
or principal, likely bankruptcy or reorganization of the not be equal to its fair value.
issuer, concessions from the bondholders, or other
indications of financial difficulty on the part of the issuer.
IFRS—Reversals
If the HTM’s value recovers in a later period, and its recovery can be
However, a credit rating downgrade or the lack of a liquid attributed to an event (such as a credit upgrade), the impairment loss
market for the debt are not considered to be indications of can be reversed. Impairments of AFS may be reversed under the same
impairment in the absence of other evidence.
conditions as impairments of HTM. Reversals of impairments are not
permitted for equity securities.