Scribd
Upload
25 views23 pages

Investmets in Debt Securities - Impairment and Reclassification

The document outlines the impairment and reclassification requirements for debt securities under IFRS 9, detailing the assessment of credit risk and the recognition of impairment losses. It explains the process for recording impairment losses and reversals, as well as the conditions and procedures for reclassifying debt investments between different accounting categories. Illustrative examples are provided to demonstrate the calculations and journal entries related to impairment and reclassification scenarios.

Uploaded by

bulala.aj
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
25 views23 pages

Investmets in Debt Securities - Impairment and Reclassification

The document outlines the impairment and reclassification requirements for debt securities under IFRS 9, detailing the assessment of credit risk and the recognition of impairment losses. It explains the process for recording impairment losses and reversals, as well as the conditions and procedures for reclassifying debt investments between different accounting categories. Illustrative examples are provided to demonstrate the calculations and journal entries related to impairment and reclassification scenarios.

Uploaded by

bulala.aj
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 23

Investment in Debt

Securities

Impairment and
Reclassification
Impairment loss on Debt Investments

Under IFRS 9, there is a single set of Impairment requirements applicable to debt investments
that are not accounted for at fair value through profit or loss. This single model facilitates
comparability of amounts that are recognized in profit or loss and reduce a significant source
of complexity for users and preparers of financial statements.
The IFRS 9 impairment model for debt securities measures and accounts impairments in these
stages:
a) The entity shall assess whether there has been a significant increase in credit risk since
initial recognition. If the entity assesses that there is none, it shall recognize a 12-month
expected credit losses.
b) If the entity assesses that there has been a significant increase in credit risk since initial
recognition, it shall recognize a lifetime expected credit losses.
Impairment loss may be related to an individual financial asset, specifically when the
contractual cash flows of the financial asset are modified.
Impairment loss = Carrying amount less Present value of estimated future cash flows
discounted at the financial asset’s original effective interest rate at initial recognition.
The amount of the loss shall be recognized in profit or loss. The entry to record the
impairment is:

Impairment loss – Debt Investments xxx


Debt Investments
(or allowance for Impairment in Value of Debt Investments) xxx
If in a subsequent period, the amount of impairment loss is recovered and the
recovery can be related objectively to an event occurring after the impairment was
recognized, the previously recovered impairment loss shall be reversed.
The reversal of impairment loss shall not result in a carrying amount of the financial
asset that exceeds what the amortized cost would have been had the impairment loss
not been recognized at the date the impairment is reversed. The amount of the
reversal shall be recognized in profit or loss.
The entry for the reversal of impairment loss on debt investments measured (e.g.
amortized cost) is:

Debt Investments at Amortized Cost xxx


Impairment Recovery of
Debt Investment (Profit or loss) xxx
Illustrative Problem: Impairment on Debt
Investment at Amortized Cost
On January 1, 2017, Quezon Company acquired 12% bonds in the face amount of P2,000,000
at a cost of P2,126,776. They mature on December 31, 2020. The bonds were acquired to yield
10%. Interest is payable every December 31. Because of the business model adopted by the
company for this type of instrument and the contractual cash flows from the bonds, X
designated the bonds as at amortized cost.

On December 31, 2018, Company, due to its prolonged financial difficulty, negotiated for
restructuring of its bonds. Having been unable to collect interest for year 2018, the
bondholders agreed to condone the interest due on this date and reduced the rate for the
remaining term of the bonds at 8%.
The expected future cash inflow based on the restructured terms shall be discounted using
the original effective interest rate:

Present value of principal (2M x .8264) 1,652,800


Present value of periodic interest (160,000 x 1.7355) 277,680
Present value of future cash flow 1,930,480

Carrying amount of the bonds and interest:


Amortized cost of the bonds 2,069,399
Interest receivable 240,000
Total carrying amount 2,309,399

Impairment loss (2,309,399 – 1,930,480) 378,919


December 31, 2018:
Interest Receivable 240,000
Debt Investment at Amortized Cost 30,055
Interest Revenue 209,945

Impairment loss 378,919


Interest Receivable 240,000
Debt Investment at Amortized Cost 138,919
December 31, 2019:
Cash 160,000
Debt Investment at Amortized Cost 33,048
Interest Revenue 193,048

All other entries in the subsequent years shall be based on the modified amortization table.
Illustrative Problem: Impairment on Debt
Investment and Recovery
On Dec. 31, 2019, Outer Company invested in the 5-year bonds of Inner Corporation. The bonds have a face
value of P3,000,000 with 8% interest payable per year. Outer paid P2,772,552 to acquire the instruments at
the prevailing market rate of 10%. The debt security was measured at amortized cost.
During 2021, Inner Corporation’s business deteriorated due to political instability and faltering global
economy. After reviewing all available evidence at Dec. 31, 2021, Outer determined that it was probable that
Inner will still be able to pay the annual interest based on the original loan but a reduced principal of
P2,500,000 at maturity. As a result, Outer decided that the investment in bonds was impaired, and that a loss
should be recorded immediately.

Required:
1. Compute the impairment loss on Dec. 31, 2022.
375,656
2. Assume that on Dec. 31, 2022, Inner’s financials had improved and informed Outer to pay back 2,900,000
maturity instead of the reduced amount of P2,500,000, compute for the amount of impairment recovery in
2022.
330,578
Reclassification from Amortized Cost:

• If from Amortized cost to Fair Value through profit or loss:


- Difference between FV and amortized cost is taken to profit or loss. Discontinue amortization of
interest, and start the fair value adjustments every subsequent reporting date.

• If from Amortized cost to Fair Value through other comprehensive income:


- Difference between FV and amortized cost is taken to other comprehensive income; Effective
interest rate is not adjusted. Continue the amortization based on the original amortization table, and
start the fair value adjustments every subsequent reporting date.
Reclassification of Debt Investments

Reclassification of debt investments is expected to be rare, as it shall be made and only when an entity
changes its business model for managing its financial assets. A reclassification is required under the
following circumstances:
a. If an entity has a portfolio of commercial loans that it sells in the short term and then subsequently
acquires a company that manages commercial loans and has a business model that holds the loans
to collect the contractual cash flows (Reclassification from FVPL to amortized cost)
b. If a financial services entity decides to shut down its retail mortgage business and is now actively
trading its portfolio (Reclassification from amortized cost of FVPL)

Reclassification is prohibited under the following circumstances:


• Change in management intention
• Temporary disappearance of a particular market
• Transfer of assets between existing models
Illustrative Problem: Reclassification at
Amortized Cost
On January 1, 2016, Pajero Company purchased 5-year bonds with face value of
P4,000,000 and stated interest of 12% per year payable annually every December
31. The bonds were acquired to yield 10%. The following data relate to the bonds:

The prevailing market rate of interest applicable to the bonds at the end of 2016
and 2017 were at 9% and 11%, respectively. A change in the business model
happened during 2017.
Reclassification from Amortized Cost (Jan. 1, 2018):

• If from Amortized cost to Fair Value through profit or loss:

Debt Investment at FVPL 4,097,749


Reclassification Loss 101,199
Debt Investment at Amortized Cost 4,198,948
(4,097,749 – 4,198,948 = 101,199)

• If from Amortized cost to Fair Value through other comprehensive income:


Debt Investment at FVTOCI 4,097,749
Unrealized Loss - OCI 101,199
Debt Investment at Amortized Cost 4,198,948
(4,097,749 – 4,198,948 = 101,199)
Reclassification from Fair Value through Profit or Loss:

• If from Fair value through profit or loss to Fair value through other comprehensive income:
- Effective interest rate (interpolation using the remaining term of the investment) shall be
calculated based on the fair value on reclassification date. Start amortization based on the remaining
term of the debt investment, and continue fair value adjustments.

• If from Fair value through profit or loss to Amortized cost:


- Fair value on date of reclassification is the initial amortized cost. Calculate an effective
interest rate (interpolation). Start amortization based on the remaining term of the debt investment,
and discontinue fair value adjustments.
Illustrative Problem: Reclassification from Fair
Value Through Profit or Loss
On January 1, 2016, Pajero Company purchased 5-year bonds with face value of
P4,000,000 and stated interest of 12% per year payable annually every December
31. The bonds were acquired to yield 10%. The following data relate to the bonds:

The prevailing market rate of interest applicable to the bonds at the end of 2016
and 2017 were at 9% and 11%, respectively. A change in the business model
happened during 2017.
Reclassification from Fair Value through Profit or Loss (Jan. 1, 2018):

• If from Fair value through profit or loss to Fair value through other comprehensive income:
Debt Investment at FVTOCI 4,097,749
Debt Investment at FVTPL 4,097,749

• If from Fair value through profit or loss to Amortized cost:


Debt Investment at Amortized Cost 4,097,749
Debt Investment at FVTPL 4,097,749
Reclassification from Fair Value through Other Comprehensive Income:

• If from Fair value through other comprehensive income to Amortized Cost:


- The effective interest rate is not adjusted. The amount accumulated in equity is removed to
adjust the asset to amortized cost, as if it had been designated at amortized cost from date of
initial recognition. Continue the amortization of interest based on the original amortization table,
but discontinue fair value adjustments.

• If from Fair value through other comprehensive income to Fair value through Profit or loss:
- Transfer the cumulative unrealized gains and losses in OCI to profit or loss. Discontinue
amortization of interest, but continue fair value adjustments.
Illustrative Problem: Reclassification from Fair
Value Through Other Comprehensive Income
On January 1, 2016, Pajero Company purchased 5-year bonds with face value of
P4,000,000 and stated interest of 12% per year payable annually every December
31. The bonds were acquired to yield 10%. The following data relate to the bonds:

The prevailing market rate of interest applicable to the bonds at the end of 2016
and 2017 were at 9% and 11%, respectively. A change in the business model
happened during 2017.
Reclassification from Fair Value through Other Comprehensive Income (Jan. 1, 2018):

• If from Fair value through other comprehensive income to Amortized Cost:

Debt Investment at Amortized Cost 4,198,948


FV Adjustments – Debt Investments 101,199
Unrealized Gain/Loss on Debt Investment at FVOCI 101,199
Debt Investments at FVTOCI 4,198,948

• If from Fair value through other comprehensive income to Fair value through Profit or loss:

Debt Investments at FVTPL 4,097,749


FV Adjustments – Debt Investments 101,199
Debt Investments at FVTOCI 4,198,948

Unrealized loss – P/L 101,199


Unrealized loss – OCI 101,199

You might also like