Are AFS Securities Tested for Impairment Anymore in IFRS?

 

Maybe I’m missing something here, but I stumbled across guidance in my technical accounting research class last week that made me wonder whether AFS securities are tested for impairment anymore in IFRS. If I’m misunderstanding this, please help me out.

In the old IAS 39, Financial Instruments: Recognition and Measurement, unrealized gains and losses in available-for-sale securities were recognized in OCI. However, if an impairment loss occurred for that AFS security, the cumulative loss recognized in OCI was reclassified from equity to profit and loss (paragraphs 55(b) and 67-70). Moreover, impairment losses recognized in profit and loss for an AFS equity security could not be reversed through profit and loss, while subsequent increases in fair value on previously impaired AFS debt securities could be reversed through profit and loss in some circumstances.

In the new IAS 39, Financial Instruments: Recognition and Measurement, and the new IFRS 9, Financial Instruments, there is no longer any such label as available-for-sale securities. In addition, the IASB decided that

…a gain or loss on those investments should be recognised once only; therefore, recognising a gain or loss in other comprehensive income and subsequently transferring it to profit or loss is inappropriate (IFRS 9, BC5.25(b)).

From what I gather, the IASB was trying to move away from so many categories for financial instruments (e.g., trading, held-to-maturity, available-for-sale) and they didn’t want to deal with issues such as recycling OCI changes back into profit and loss. So where does that leave us with AFS securities in IFRS?

Although there is no longer a label for available-for-sale securities, you can still find the same basic accounting permitted within IFRS 9. First, par. 4.1.1 would allow a financial asset to be measured at fair value on the Statement of Financial Position, while par. 5.7.5 would allow an irrevocable election to present in OCI subsequent changes in the fair value of that investment if it is an equity instrument. So far, the same AFS treatment is available under the new guidance, at least for equity investments. But here’s the kicker. The impairment guidance in IFRS 9 and IAS 39 only applies to financial assets measured at amortized cost, as shown here:

An entity shall assess at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets measured at amortised cost is impaired (IAS 39, par. 58).

At first, I was very surprised to think that the IASB no longer requires an impairment test for equity securities measured at fair value through OCI. In fact, I thought I was just missing something. But then I read further into the basis for conclusions in IFRS 9:

In addition, the Board noted that recycling of gains and losses to profit or loss would create something similar to the available-for-sale category in IAS 39 and would create the requirement to assess the equity instrument for impairment, which had created application problems (IFRS 9, BC5.25(b)).

Because of this reasoning, the IASB seems to have decided not to test for impairment AFS equity securities measured at fair value through OCI. Does this surprise anyone else? Does it seem odd given that US GAAP clearly requires an impairment test for AFS securities, both debt and equity types (ASC 320-10-35-17) ?  Perhaps I am just completely missing something, and if so, please chime in with your comments. Is this issue just no longer a big deal? Or was the big deal related only to AFS debt securities and not AFS equity securities? Maybe I need to go find something else to think about for a while…

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