Impairment Of Assets And Subsequent Events Reporting
The accounting reporting and practice in the US is governed and regulated by the International Accounting Standards Board and the Financial Accounting Standards Board both of which operate in collaboration with American Institute of Certified Public Accountants. The contemporary accounting environment is becoming complex and advanced, thuds making the two bodies to be always aggressive in instituting changes that are tailored around the modern changes in business environment. In the AICPA, the International Accounting Standards Board has announced changes in reporting of loan value and other financial instruments by banks and other financial institutions (AICPA, 2009). This is also reported in the FASB corporate website. Financial institutions are required by the IASB and FASB to publish audited financial reports at the end of every financial year in addition to unaudited interim statements after every quarter of financial year. In FASB, there is a new requirement that tends to address the accounting and reporting of subsequent events. This will be an amendment of the FASB No. 165 which handles the issue of accounting and reporting of subsequent events in financial statements.
AICPA is a regulatory body for the certified accountants whose mission I to ensure that accountants provide valuable services to all stakeholders through provision of relevant resources, information and leadership (AICPA, 2009). Before this announcement for amendment, financial instruments have been impaired through the use of incurred loss model whereby loan repayment was being done until a trigger event was identified that necessitated the lowering of loan value. This has been a challenge since the expected losses were only recognized when the trigger event was identified, affecting even the realization/recognition of interest income by the financial institutions. Generally, impairment of assets refers to the loss of the value of the asset relative to the book value of the same asset. In other words, the cash flow from the assets tends to be less than the carrying value of the asset in question. Financial assets normally get impaired due to the changes in economic conditions that affect the market interest rate, thus making the price of the financial asset differ from the fair market price. Under the new model, financial institutions will make a provision for credit losses that will run throughout the life of the loan.
This new proposal is aimed at replacing the old standard in ‘IAS 39 – Financial Instruments: Recognition and Measurement’ and incorporating a new standards under IFRS 9 Financial Instruments, following the limitation of the former standard in addressing the treatment of impairment of financial assets. It will eliminate the complexity of recognizing the loss component of the impairment. For instance, where a loan issued at 5% interest rate can fetch 10% interest rate in the market, and then there will obviously a loss that has to be disclosed separately as a loss on impairment of the financial asset. The impairment loss is normally recognized in the profit and loss account as an expense although it can be reversed in the subsequent financial period where it reduces due to events occurring after its recognition. This recognition will have an effect on the rate of interest which has to be discounted to take care of the impairment loss. Therefore, the proposed amendment will ensure that the banks and financial institutions report the amount of loan having factored the impairment loss. This amendment has been necessitated by the current financial crisis that has been affected the financial market to an extent of making some financial institutions to collapse.
The proposed amendment tends to be a move in the right direction as it will allow the recognition of financial instruments at their fair value when preparing financial statements. This will provide the right valuation that can be relied upon by the users of financial statements. The financial market is always volatile, causing frequent fluctuations of the value of financial instruments and therefore it would be prudent to report the value of the instruments at their current carrying value. To the users of the financial statements, the new mode of reporting will give a clear picture of the firm’s financial position and the effect of the market conditions on the firm’s financial assets, thus making it possible for the users to make reasonable decisions. However, not all conditions will necessitate the recognition of impairment especially where the conditions are temporary and are not likely to adversely affect the prices of the financial assets for quite a long time.
The valuation of financial assets to determine the impairment loss should also put into consideration the price in arms length asset measurement and the prevailing fair value of similar financial instrument in the market.
One of the most affected financial instrument/asset is the loan where impairment will come in the form of the lender being unable to recover the whole amount as per the terms of the loan agreement. In this case, making a provision of loss on part of the loan will be more realistic in order to portray the right or fair position of the firm’s financial position.
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