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Impairment of held to maturity investments

CA Sachin Rastogi (Audit/IFRS Manager) (338 Points)

10 September 2012

Please advise me on the following querry:

A Company is having bonds of USA domiciled financial institution which carries fixed interest rate at 5% pa maturing in 2020. Bonds were purchased in 2007 and these were designated as Held to Maturity under IAS 39 and accounted on amortised cost. As on a current date, the interest rate on these bonds is only 1% pa(assume).

Current rate being lower than original interest rate will result in lower fair value (using current interest rate as required under IFRS 7) of these bonds compared to its carrying value in the books. Now the question is whether, the reduction in fair value is an indicator of impairment on these bonds. If yes, than please share your supportive thoughts.

Thanks

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4 Replies

CA C.JANANI (partner) (270 Points)
Replied 16 September 2012

IAS-39 prescribes as one of the indicators of impairment as "Observable data indicating that there is a

measurable decrease in the estimated future cash flows from a group of financial assets since the initial

recognition of these assets . The above clause may be considered to reflect the the decraese in interest rate as a factor leading to impairment.

Any further ideas?

CA Sachin Rastogi (Audit/IFRS Manager) (338 Points)
Replied 17 September 2012

Well a decrease in current interest rate will result in a lower fair value as compared to carrying value and is truly ann indicator of impairment. However, in practical sense I personally feel that there is no impairment reason being, at the maturity I will get the original contracted interest rate and not the market rate.

So on the said maturity date i will gain more interest compared to market interest which doesnt indicate any impairment at my end.

Please think and share ur thoughts.

Thanks

CA C.JANANI (partner) (270 Points)
Replied 19 September 2012

If it is meant not to affect the future cash flows then the very impairment is questionable and it can well be argued from your point of view.

Sanjay Chauhan (IFRS) (IFRS) (2714 Points)
Replied 12 January 2013

Dear Friends,

To chip-in on the query, i would say that Fixed income earning investments that are desinated as held for sale can be impaired only if there is a credit risk. Change in prevailaing market interest rate does not impact the accountig of it. Since it is a financial asset, the fair value considering the current markt rate has to be worked out and disclosed in notes as per IFRS 7.

Had it been classified FVTPL, the change in fair value due to on account of both, default risk + interest risk, would have been accounted in books of accounts.

Regards,