ipsas 29—financial instruments: recognition and measurement - IFAC

FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
E.4 Impairment and Uncollectibility of Financial Assets
E.4.1 Objective Evidence of Impairment
Does IPSAS 29 require that an entity be able to identify a single, distinct past
causative event to conclude that it is probable that an impairment loss on a
financial asset has been incurred?
No. IPSAS 29.68 states “It may not be possible to identify a single, discrete event
that caused the impairment. Rather the combined effect of several events may have
caused the impairment.” Also, IPSAS 29.69 states that “a downgrade of an entity’s
credit rating is not, of itself, evidence of impairment, although it may be evidence of
impairment when considered with other available information.” Other factors that an
entity considers in determining whether it has objective evidence that an impairment
loss has been incurred include information about the debtors’ or issuers’ liquidity,
solvency and business and financial risk exposures, levels of and trends in
delinquencies for similar financial assets, national and local economic trends and
conditions, and the fair value of collateral and guarantees. These and other factors
may, either individually or taken together, provide sufficient objective evidence that
an impairment loss has been incurred in a financial asset or group of financial assets.
E.4.2 Impairment: Future Losses
Does IPSAS 29 permit the recognition of an impairment loss through the
establishment of an allowance for future losses when a loan is given? For example, if
Entity A lends CU1,000 to Customer B, can it recognize an immediate impairment
loss of CU10 if Entity A, based on historical experience, expects that 1 percent of the
principal amount of loans given will not be collected?
No. IPSAS 29.45 requires a financial asset to be initially measured at fair value. For
a loan asset, the fair value is the amount of cash lent adjusted for any fees and costs
(unless a portion of the amount lent is compensation for other stated or implied rights
or privileges). In addition, IPSAS 29.67 requires that an impairment loss is
recognized only if there is objective evidence of impairment as a result of a past
event that occurred after initial recognition. Accordingly, it is inconsistent with
IPSAS 29.45 and IPSAS 29.67 to reduce the carrying amount of a loan asset on
initial recognition through the recognition of an immediate impairment loss.
E.4.3 Assessment of Impairment: Principal and Interest
Because of Customer B’s financial difficulties, Entity A is concerned that
Customer B will not be able to make all principal and interest payments due on
a loan in a timely manner. It negotiates a restructuring of the loan. Entity A
expects that Customer B will be able to meet its obligations under the
restructured terms. Would Entity A recognize an impairment loss if the
restructured terms are as reflected in any of the following cases?
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IPSAS 29 IMPLEMENTATION GUIDANCE
PUBLIC SECTOR