Decline in the fair value of an impaired available-for-sale equity investment
Company A acquired 100 shares in Company X on 1 January 2012, for their fair value of €10,000. On 31 December 2012, A’s year end, the fair value of the shares in X had fallen to €6,000 and A concluded the shares were impaired. Accordingly, in its 2012 financial statements, A recognised an impairment loss of €4,000 in profit or loss.
On 31 December 2013, the fair value of the shares in X had fallen a little further to €5,900. In its 2013 financial statements, should A automatically regard the loss of €100 as a further impairment (to be recognised in profit or loss) or should it regard it as a normal revaluation to be recognised in other comprehensive income?
The implementation guidance to the standard suggests that any further declines in the fair value of an impaired available-for-sale equity instrument should be recognised in profit or loss, although only in the context of explaining the treatment of portions of fair value movements arising from foreign currency changes. [IAS 39.E.4.9].
However, perhaps because the accounting treatment is said to be comparable to US GAAP (see 6.3.2 above), some considered that, once impaired, the asset acquired a new ‘cost base’ equal to the fair value at the date of impairment. Consequently, the €100 decline in fair value would be assessed for impairment as if the asset had been acquired on 31 December 2012 for €6,000. This approach would not necessarily result in the €100 being characterised as an impairment loss.