Increase in the fair value of an impaired available-for-sale debt investment
An entity purchased a debt instrument, which it designated as available-for-sale with a cost of CU 100. In year two, the fair value of the instrument decreased to CU 70 and the entity concluded that the instrument was impaired and consequently recognised an impairment loss of CU 30. In year three, the fair value of the instrument increases to CU 95.
Scenario 1 – The entity can determine that there is no longer any objective evidence of impairment. That is, the credit event triggering the impairment reverses in its entirety.
Scenario 2 – The entity cannot determine that there is no longer any objective evidence of impairment (that is, the credit event triggering the impairment did not entirely reverse) however, it can determine that the credit quality of the instrument improved compared to the situation when the instrument was impaired.
In both scenarios, the entity might have reversed a small part of the impairment loss through the application of the higher effective interest rate determined at the time the instrument was impaired. This effect is ignored in the conclusion below.
An entity can only reverse through profit or loss an increase in the fair value of an available-for-sale debt instrument that occurs subsequent to impairment if there is an actual improvement in the credit quality of the instrument. If there is no improvement in the credit quality, the entity recognises the increase in fair value in OCI. Judgement is required to determine whether the credit event triggering the impairment reversed in its entirety (i.e. there is no longer any objective evidence of impairment) or whether there is only some improvement in credit quality.
Scenario 1 – If there is no longer objective evidence of impairment, such that the event reversed in its entirety, we believe the entity has an accounting policy choice, which it must apply consistently:
The entity can recognise in profit or loss a reversal of impairment of CU 30 and recognise a loss of CU 5 in OCI or it can recognise in profit or loss a reversal of impairment of CU 25.
Scenario 2 – If there is some evidence of improvement in credit quality, but the credit event did not reverse, the entity has an accounting policy choice, which it must apply consistently:
The entity can recognise in profit or loss a reversal of impairment of CU 25. Alternatively, the entity could choose not to recognise any reversal of impairment in profit or loss, until the event reverses in its entirety. Therefore, the entity recognises an increase in fair value in OCI (of CU 25).