Let me start this item by reminding you of certain of the principles of impairment (including reversal of impairment) under IAS 36, and of interim reporting under IAS 34.
Under IAS 36, entities must perform an annual review for indicators of impairment (all assets), and an annual test involving the comparison of carrying amount and recoverable amount for certain intangibles, and, of course, goodwill. Whilst the test for impairment of certain intangibles and goodwill is made irrespective of whether there are any indications of impairment, it may be carried out at any point in time, but at the same date thereafter for each year that the balances remain. Impairments are then to be reversed in a later period, when there is objective evidence that the circumstances that gave rise to the impairment have now reversed… but never for impairments made in respect of goodwill (paragraphs 122 and 124 of IAS 36)
IAS 34 sets out a number of important principles about the preparation of interim financial statements when an entity is required to prepare IFRS compliant interim statements. Fairly obviously, it requires the application of the same accounting policies in the interim statements as would be applied annually (‘don’t throw away the rule book just because it is a shorter period’). It also requires the measurements to be made on the basis of a year-to-date measurement, which then means that the frequency of reporting will have no impact on the measurement of annual results. Thus, the accumulation of, say, four quarters of business would equate to the measurement in one go of the annual results (paragraph 28 of IAS 34).
So, consider an entity that prepares quarterly financial statements under IAS 34, that has identified circumstances of an impairment in certain items of property, plant and equipment during quarter 2. It takes the impairment loss in Q2, as required by IAS 34, using IAS 36 in the same way as it would annually. Suppose then, that it is clear in Q4 of that same year, that the circumstances of the impairment have reversed. It therefore reverses the impairment in Q4. Let’s suppose that the net impairment as a result of these two circumstances is zero – it follows that the results for the year as a whole would have no impairment, and this would equate (other things being equal) to the result of adding up four quarters of performance. Simple principles to apply, eh? Except when the impairment relates to goodwill, when IAS 36 does not allow reversal of an impairment.
So, consider an entity that prepares quarterly financial statements, and suffers an impairment of goodwill in Q2, which has then apparently reversed in Q4. The question now has to be asked “Which rule has precedence? The non-reversal of a goodwill impairment, or the idea that frequency of reporting should not affect annual results, achieved by measurements made on a year-to-date basis?” (Think of an identical entity that does not prepare interim financial statements… it would simply have no impairment of goodwill for the year). This is where IFRIC 10 applies, and gives a somewhat perverse result.
IFRIC 10 simply states that the impairment principle overrides the interim reporting measurement rule (frequency of reporting should not affect the measurement of annual results). Thus paragraph 8 states “An entity shall not reverse an impairment loss recognised in a previous interim period in respect of goodwill”. So, the two identical entities considered in the previous paragraph, one an interim reporter, the other a once annual reporter, will now have different annual results.
Note that IFRIC 10 has been amended to remove the consensus on the same issue that arises under IAS 39 with the potential reversal of an impairment loss on certain equity instruments held – IFRS 9 does not have the same impairment (and reversal) rules as IAS 39.
Having mentioned IFRS 9, can I finally pose a question for you to ponder over the next week or two, before I answer it then. The amendment made to IFRS 4 at the end of last year introduced a presentation choice for insurers where the application of IFRS 9 (for those, perhaps few, insurers who decide to apply IFRS 9 from earlier than they are obliged to) triggers increased P&L volatility from the fair valuing requirements of IFRS 9, when compared to the fair valuing through P&L of IAS 39. I am not going to go into the whys and wherefores of the amendment, but I am interested in the implication that there could be different fair value P&L volatilities when IFRS 9 is applied as opposed to IAS 39. My question to you is this: Other than by the exercise of different designation choices under IFRS 9 compared to IAS 39, in what circumstance would IFRS 9 trigger increased volatility in the P&L? Watch out for a later post from me with the answer!
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