Tải bản đầy đủ - 0 (trang)
Temporary v. OTT Impairment of Investments

Temporary v. OTT Impairment of Investments

Tải bản đầy đủ - 0trang

APPENDIX 12B



OTT Impairments of Equity Investments

1. Is the investment impaired?

• Impairment occurs when fair value has declined to a level

below the investment’s cost

• Investment’s cost equals the investment’s purchase price less

previously recognized impairments and other adjustments



2. Is any impairment other-than-temporary (OTT)?

• Equity impairments are OTT if the investor cannot assert it

has the intent and ability to hold the investment until fair

value recovers



3. Where is the OTT impairment reported?

• The investor recognizes the loss in the income statement,

just as if the loss had been realized by selling the investment

• Must reclassify amounts out of OCI that were recorded

previously as unrealized gains or losses



APPENDIX 12B



Illustration: Disclosure about OTT Impairments

of Equity Investments—Bank of America



APPENDIX 12B



Illustration: OTT Impairment of an Equity Investment



United Intergroup, Inc., buys and sells both debt and equity securities of

other companies as investments. United’s fiscal year-end is December

31. The following events during 2016 and 2017 pertain to the

investment portfolio.

Purchase Investments - July 1, 2016

• Purchased $1,000,000 of Bendac common stock.

Adjust Investments to Fair Value

• Dec. 31, 2016 - Valued the Bendac stock at $990,000 and determined

that the decline in FV should not be treated as an OTT impairment.

• Dec. 31, 2017 - Valued the Bendac stock at $985,000 and determined

that the decline in FV should be treated as an OTT impairment.



Journal Entry – December 31, 2016

Net unrealized holding gains and losses-OCI

Fair value adjustment



Debit Credit

10,000



$1,000,000 − $990,000



10,000



OTT Impairment of an Equity Investment



APPENDIX 12B

(Illustration continued)



United Intergroup, Inc., buys and sells both debt and equity securities of

other companies as investments. United’s fiscal year-end is December

31. The following events during 2016 and 2017 pertain to the

investment portfolio.

$1,000,000 − $985,000

Purchase Investments - July 1, 2016

• Purchased $1,000,000 of Bendac common stock.

$1,000,000 − $990,000

Adjust Investments to Fair Value

• Dec. 31, 2016 - Valued the Bendac stock at $990,000 and determined

that the decline in FV should not be treated as an OTT impairment.

• Dec. 31, 2017 - Valued the Bendac stock at $985,000 and determined

that the decline in FV should be treated as an OTT impairment.



Journal Entry– December 31, 2017

Other-than-temporary impairment loss-I/S

Investment in Bendac

Fair value adjustment

Net unrealized holding gains and losses-OCI



Debit Credit

15,000

15,000

10,000



10,000



OTT Impairments of Debt Investments



APPENDIX 12B



1. Is the investment impaired?

• Total amount of impairment is split into:

• Credit losses: occur due to anticipated reductions in cash flows from the debt

investment

• Noncredit losses: it captures other reductions in fair value such as those due to

changes in general economic conditions



2. Is any impairment other-than-temporary (OTT)?

• Debt impairment is viewed as OTT if the investor:

a) Intends to sell the investment

b) Believes it is more likely than not that they will sell the investment prior to fair

value recovery

c) Determines that a credit loss exists on the investment



3. Where is the OTT impairment reported?

• Investment is written down to fair value in the balance sheet

• Amount included in net income or OCI depends on the reason that:

• If OTT is because of 2(a) or 2(b), all of the OTT impairment loss is recognized in net

income

• If OTT is because of 2(c), only the credit loss is recognized in net income; noncredit

loss in OCI



APPENDIX 12B



Illustration: Disclosure about OTT Impairments

of Debt Investments—Bank of America



Illustration: OTT Impairment of Debt Investment



APPENDIX 12B



United Intergroup, Inc., buys and sells both debt and equity

securities of other companies as investments. United’s fiscal yearend is December 31. The following events occurred during 2017

Purchase Investments - July 1, 2016

• Purchased $1,000,000 of Bendac bonds, maturing on December

31, 2022.

Adjust Investments to Fair Value - December 31, 2017

• Valued the Bendac bonds at $950,000. Of the $50,000

impairment, $30,000 is credit loss and $20,000 is noncredit loss.

Case 1: United either plans to sell the investment or believes it is

more likely than not that it will have to sell the investment

before fair value recovers.

$1,000,000 − $950,000



Journal Entry– December 31, 2017

OTT impairment loss – I/S

Discount on bond investment



Debit

50,000



Credit

50,000



OTT Impairment of Debt Investment



(Illustration continued)



APPENDIX 12B



United Intergroup, Inc., buys and sells both debt and equity

securities of other companies as investments. United’s fiscal yearend is December 31. The following events occurred during 2017

Purchase Investments - July 1, 2016

• Purchased $1,000,000 of Bendac bonds, maturing on December

31, 2022.

Adjust Investments to Fair Value - December 31, 2017

• Valued the Bendac bonds at $950,000. Of the $50,000

impairment, $30,000 is credit loss and $20,000 is noncredit loss.

Case 2: United does not intend to sell the investment and does

not believe it is more likely than not that it will have to sell the

Bendac investment before fair value recovers, but estimates that

$30,000 of credit losses have occurred.

Journal Entry– December 31, 2017

Debit Credit

OTT impairment loss – I/S

30,000

30,000

Discount on bond investment

20,000

OTT impairment loss – OCI

Fair value adjustment-Noncredit loss

20,000



Income Statement Presentation of

OTT Impairment of Debt Investment

Income Statement Presentation,

December 31, 2017

OTT impairment of AFS investments:

Total OTT impairment loss

Less: portion recognized in OCI

Net impairment loss recognized in net income



APPENDIX 12B



(Illustration continued)



Case 1



Case 2



$50,000 $50,000

–0– 20,000

$50,000 $30,000



APPENDIX 12B



Illustration: Other-Than-Temporary Impairment of

Equity Investments and Debt Investments Compared



Differences between IFRS and U.S. GAAP (continued)



LO12-8



IFRS

U.S. GAAP

Accounting for OTT impairments

For an HTM investment, the

For an HTM investment, the

impairment is calculated as the

impairment is calculated as the

difference between the amortized difference between the amortized

cost of the asset and the present

cost of the asset and the present

value of expected future cash

value of expected future cash

flows, estimated at the asset’s

flows, estimated at the asset’s

original effective rate.

original effective rate. So, the

impairment is essentially equal to

the amount that would be

considered a credit loss.

Allows recoveries of impairments Does not allow recoveries of any

to be recognized in earnings for

OTT impairment of equity or debt

debt investments, but not for

(other than debt that is classified

equity investments.

as a loan).



Tài liệu bạn tìm kiếm đã sẵn sàng tải về

Temporary v. OTT Impairment of Investments

Tải bản đầy đủ ngay(0 tr)

×