Credit crunch: impairment of available-for-sale debt securities

Publication date: 12 Feb 2009

D plc, an IFRS reporter, holds an investment in debt securities which it classifies as available-for-sale (AFS). D plc is considering the impact of the increase in market interest rates as a result of the credit crunch.

D plc is deliberating whether to retain the investment. D plc decides to sell the investment in the near future, but has not sold it at the year end. The fair value of the investment is less that its amortised cost. The loss has been driven by the increase in interest rates only and the expected cashflows on the securities have not decreased.

  1. Is an increase in market interest rates objective evidence of impairment of an AFS debt instrument?
  2. Is D plc’s intention to sell the debt instrument at a loss objective evidence of impairment of the AFS debt instrument?

1. An increase in market interest rates of itself is not considered objective evidence of impairment of an AFS debt instrument.

Under paragraph 59 of IAS 39, Financial Instruments: Recognition and Measurement, a financial asset is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event has an impact on the estimated future cashflows of the financial asset or group of financial assets that can be reliably measured.

Paragraph 59, IAS 39 clarifies that the factors which should be considered when assessing whether there is objective evidence of impairment, include:

  • significant financial difficulty of the issuer;
  • breach of contract, such as default or delinquency in interest or principal;
  • granting of a concession to the issuer;
  • high probability of bankruptcy;
  • disappearance of an active market because of financial difficulties; and
  • observable data indicating there is a measurable decrease in the estimated future cashflows since initial recognition.

Example 4.10 in the implementation guidance to IAS 39 confirms that a decline in the fair value of a financial asset below its cost or amortised cost, for example, a decline in the fair value of an investment in a debt instrument that results from an increase in the basic, risk-free interest rate, is not necessarily evidence of impairment.

2. There is no consideration of the intent or ability of an entity to hold a financial asset when assessing whether a financial asset is impaired in accordance with paragraph 59, IAS 39.

If D plc sells the debt instrument shortly after the year end at a loss, and the loss is driven solely by the increase in interest rates, the debt instrument would not be considered impaired at the year end. There is no impairment arising from the cashflows of the asset; the loss is driven by D plc’s decision to sell the asset. Therefore, the loss should be recognised when the debt instrument is sold.

 
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