Hello guys,
Just one question i don’t seem to get right. I though reversal was forbidden in any kind of way under USGAAP. I came along a question on a Mock exam stating that reversal of available fo sale securities was aloud under both USGAAP and IFRS.
Can anybody confirm? Does the “unrealized gain from available for sales security” reported in other comprehensive income correspond to a reversal? i which case allowed under US GAAP?
This is confusing to me.
Thanx
Hi Cixi87,
I think this is definitely something reviewing for accounting. Differences with between US GAAP and IFRS and reversals will definitely be in the exam. I just double-checked as I wasn’t too sure myself. If you look at page 467 of the CFA Volume 3 under 5.5 Reversals of Impairments of Long-Lived Assets you will find your answer.
IFRS determine reversals on impairment losses of long-lived assets for recoverable amounts up to the previous carrying amount, and it doesn’t matter if it is held for use or for sale.
US GAAP determine accounting for reversals contingent on whether the asset is held for use or held for sale. If held for use - the impairment loss cannot be reversed. For held for sale however, if the fair value increases after an impairment loss, the loss can be reversed.
I hope that makes sense. I think US GAAP and IFRS standards & differences will be a memory exercise when recalling these for the exam.
Good luck.
Thanx Pepesilva,
Guess i have to go through that again. I will check that page as soon as i get home.
Good luck to you too
Hi, Pepesilva :
Do you think that the statements on P.467 are also applicable to available-for-sale securities ? Are those statements aplicable only to long-lived assets (LLA) ? I am confused by this too.
Hi alpha,
Thank you for bringing this up - this is something I need to look into and should have paid more attention to when reviewing this.
I think we have to try to clearly distinguish between available-for-sale and held-for-sale securities and to distinguish between what constitutes a reversal and purely being measured at fair value.
From my understanding, available-for-sale securities are financial assets that are not held for trading, measured at fair value with unrealised gains/losses being recognised in OCI upon their sale. What makes this even more confusing is that the “available for sale” classification no longer exists under IFRS (as of 2010) and are referred to as “financial assets measured at fair value through other comprehensive income”. Having read over p243 of CFA1 Volume 3, with reference to Exhibit 11, it appears that only changes in fair value (unrealised gains/losses & OCI of equity) are recorded in the balance sheet and are not recorded in the income statement until realised/sold. Does an increase in fair value of an available-for-sale following a decrease fit under the definition of a reversal? If so, under US GAAP reversals of available-for-sale assets are possible.
Held-for-sale assets, on the other hand, are long-lived assets that are no longer being used and are intended to be sold. Under US GAAP, if a held-for-sale asset suffers an impairment loss, the loss can be reversed if the fair value of the asset does increase subsequently.So I apologise for implying that held-for-sale assets and available-for-sale securities are in the same category.
I feel this raises the question of what constitutes a reversal. Is it purely an upward valuation of an asset to its fair value following a decline in value or does a reversal imply a previous impairment (unanticipated decline in the value of an asset?) for which the loss is subsequently recovered? I would think that it is important to look out for impairment when we come across questions regarding reversals.
I believe the question Cixi87 came across was one of those challenging wordy questions. If it stated that available-for-sale securities can be reversed under both US GAAP and IFRS, it may have the effect of confusing the reader as there is a section in that same reading describing how impairment reversals are treated and would lead us to believe that reversals (in general - fair value gains) are not permitted under US GAAP. It is an area that I am strugling with and am still trying to wholly grasp.
Good luck.
Guys, accounting for financial instruments can get rather difficult, so let me throw in my bit in the hope that you find this helpful:
As per PepeSilvia’s previous post, do not confuse Available for sale (a category reserved for certain financial assets) with assets which are Held-for-sale (which may contain anything from property, plant and equipment to intangbles assets). The rules with respect to both are very different.
I recommend you associate the term REVERSAL with reversing/undoing a previously recorded impairment loss. If the fair value of a financial asset classified as available for sale falls in one period and then subsequently rises, it does not imply that the asset necessarily became impaired (initial fall in value) or that the subsquent increase in value should be decribed as a reversal. Most of the time, such movements are treated as standard up or down fluctuations in fair value, which change the asset’s carrying amount and are recoded in equity via OCI.
all the best!