# Impairment of Financial Assets

Hello guys, Hope you are doing well with your study! My question has to do with impairment on financial assets and specifically for AFS securities: The CFAI text (Volume 2, p.127) says: “For AFS securities (both debt & equity) if the decline in fair value is other than temporary, the cost basis of the security is written down to its fair value, which becomes the new cost basis, and the amount of the write down is treated as a realized loss”. What I cannot undrestand is the cost basis. My logic says that since AFS securities are measured at fair value and unrealised gains or losses go to OCI isn’t the cost basis = fair value?I cannot figure out how the cost basis is different from fair value… Can someone help with an example? Thanks!

cost basis means cost. Just know under AFS, if the asset changes in value then the unrealized gain or loss sits in OCI as a “waiting room” until you sell it or it matures and then you realize the gain/loss. The example on pg 128 helps…I think the AFS unrealized gain of 53,000 is just the 350k-300k cost plus the 3k amortization, but why is this 3k a gain? I thought we bought the thing for 300 but par is only 275 so isn’t that buying it at a premium so we have to mark it down to par val?

At purchase: Par = 275 BV = 300 FV = 350 You have to amortize the premium you paid over par using the effective interest method. This reduces your BV each period so by the time you reach maturity the BV=par. This means that after 1 period the BV = 297 and the FV = 350 resulting an unrealized gain of 53 reported in OCI and sitting in AOCI on the B/S.

awesome, thanks AAA