LEARNING OBJECTIVE 4

Other Reporting Issues Evaluate other major issues

related to debt and equity
investments.

Impairment of Value
A company should evaluate every debt investment accounted for
at amortized cost, at each reporting date, to determine if it has
suffered impairment—a loss in value such that the fair value of
the investment is below its carrying value.

If the company determines that an investment is impaired, it

writes down the amortized cost basis of the individual security to
reflect this loss in value.

The company accounts for the write-down as a realized loss,

and it includes the amount in net income.

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 Impairment of Value

Impairment—Investment Measured at
Amortized Cost
Illustration: At December 31, 2018, Mayhew Ltd. has a debt
investment in Bao Group, purchased at par for ¥200,000
(amounts in thousands). The investment has a term of four years,
with annual interest payments at 10 percent, paid at the end of
each year (the historical effective-interest rate is 10 percent). This
debt investment is classified as held-for-collection.
Using the following information record the loss on impairment.

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 Investment Measured at Amortized Cost
ILLUSTRATION 17.22
Investment Cash Flows

ILLUSTRATION 17.23
Computation of
Impairment Loss

Loss on Impairment 12,680

Allowance for Impaired Debt Investments
17-3
12,680
 Recovery of Impairment Loss

If subsequently the impairment loss decreases, some or all of

the previously recognized impairment loss shall be reversed
with a
 debit to the Allowance for Impaired Debt Investments
account and
 crediting Recovery of Impairment Loss.
Reversal of impairment losses shall not result in a carrying
amount of the investment that exceeds the amortized cost that
would have been reported had the impairment not been
recognized.

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 Recovery of Impairment Loss

For example, assume that on March 31, 2020, Mayhew

determines that Bao’s credit risk has declined significantly.
Mayhew therefore decides to reverse the impairment by making
the following entry.

Allowance for Impaired Debt Investments 12,680

Recovery of Loss on Impairment 12,680

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 Impairment of Value

Impairment—Debt Investments (HFCS)

Companies that have debt investments that are held-for-
collection and selling (HFCS) report the investment at fair value,
and any changes in fair value are reported in other
comprehensive income.

For these investments, companies use a different impairment

model.

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 Impairment—Debt Investments (HFCS)

Illustration: Assume that Alexander AG purchases a HFCS debt

investment on July 1, 2019, for €1,000,000 (its face value). The
debt investment has an interest rate of 7 percent and a maturity
date of July 1, 2024. At December 31, 2019, the fair value of the
investment has declined to €960,000, due to an increase in
market interest rates. The entries to record this debt investment
in 2019 are shown in Illustration 17.24.

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 Impairment—Debt Investments (HFCS)

ILLUSTRATION 17.24
HFCS Impairment Entries

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 Impairment—Debt Investments (HFCS)

At December 31, 2019, Alexander AG’s financial statements are

as shown in below.

ILLUSTRATION 17.25
Financial Statement Presentation

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 Impairment—Debt Investments (HFCS)

What happens if the €40,000 decline is caused by

(1) a change of €10,000 due to market interest rate changes and

(2) an impairment of €30,000 due to credit risk?

In this case, the third entry in Illustration 17.24 changes because

the impairment loss of €30,000 is reported in the income statement,
not in other comprehensive income. The entries to record the
impairment and the change in fair value and related closing entry
are shown in Illustration 17.26.

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 Impairment—Debt Investments (HFCS)

What happens if the €40,000 decline is caused by

(1) a change of €10,000 due to market interest rate changes and

(2) an impairment of €30,000 due to credit risk?

ILLUSTRATION 17.25
Impairment Entries—Increase in Credit Risk
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 Impairment—Debt Investments (HFCS)

At December 31, 2019, Alexander’s financial statements are as

shown. ILLUSTRATION 17.27
Financial Statement
Presentation

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 Impairment—Debt Investments (HFCS)

If we assume Alexander sells its debt investments on January 1,

2020, for €960,000 (its fair value at that time), the entries are as
follows.

Cash 960,000
Loss on Sale of Debt Investment 10,000
Allowance for Impaired Debt Investments 30,000
Debt Investments 1,000,000

Fair Value Adjustment 10,000

Accumulated Comprehensive Income 10,000

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 Impairment—Debt Investments (HFCS)

What happens if Alexander decides to keep its debt investment

and later determines that its credit risk on this investment has
decreased by €15,000? In this case, it makes the following entry.

Allowance for Impaired Debt Investments 15,000

Recovery of Impairment Loss 15,000

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 Impairment—Debt Investments (HFCS)

ILLUSTRATION 17.28
Impairment Model Summary

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 Transfers Between Categories

Transferring an investment from one classification to another

 should occur only when the business model for managing
the investment changes.
 IASB expects such changes to be rare.
 Companies account for transfers between classifications
prospectively, at the beginning of the accounting period
after the change in the business model.

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 Transfers Between Categories

Illustration: British Sky Broadcasting Group plc (GBR) has a

portfolio of debt investments that are classified as trading; that is,
the debt investments are not held-for-collection but managed to
profit from interest rate changes. As a result, it accounts for these
investments at fair value. At December 31, 2018, British Sky has
the following balances related to these securities.

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 Transfers Between Categories

Illustration: As part of its strategic planning process, completed

in the fourth quarter of 2018, British Sky management decides to
move from its prior strategy—which requires active management
—to a held-for-collection strategy for these debt investments.
British Sky makes the following entry to transfer these securities
to the held-for-collection classification.

Debt Investments 125,000

Fair Value Adjustment 125,000

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 Copyright

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