CFM23095 - New UK GAAP: FRS 105: financial instruments: financial assets: impairment

For those entities applying FRS 105 with an accounting period beginning on or after 1 January 2016.

At the end of each reporting period a micro-entity has to assess whether there is evidence of impairment of any financial asset.

Is a financial asset impaired?

FRS 105 sets out examples of evidence that could indicate that a financial asset is impaired. These are as follows:

  • Significant financial difficulty of the debtor;
  • A breach of contract, such as default of interest or principal;
  • It is probable the debtor will enter bankruptcy or other financial reorganisation;
  • Declining market value in the asset or similar assets;
  • Significant adverse change in a related technological, market, legal or economic environment; and
  • The contract has become an onerous contract.

Measurement of an impairment loss

If there is objective evidence of impairment for a micro-entity’s financial asset, the impairment loss is measured as the difference between the asset’s carrying value and the total estimated net cash flows which can be generated from the asset. If the time value of money is material, the estimated net cash flows are discounted to their present values, using the contractual interest rate.

There are two exceptions:

  • Investments in preference or ordinary shares and investments in subsidiaries, associates and interests in jointly controlled entities are impaired when the carrying amount exceeds the best estimate of the asset’s selling price at the reporting date.
  • Derivatives are impaired when the asset’s carrying value exceeds the asset’s fair value less costs to sell.

All impairment losses are immediately recognised in profit or loss.

Reversal of an impairment loss

A micro-entity reverses an impairment loss for financial assets when, in a subsequent period, the previously recognised impairment loss decreases and the decrease is related an event that has occurred since the impairment was recognised (e.g. subsequent improvement in the debtor’s credit rating).

The reversal is immediately recognised in profit or loss.