Financial Assets (FA) are instruments (or securities) whose values are derived from a contractual right to receive cash or other other financial assets from the issuer. It usually results from holding a security issued by another entity. Examples include, cash, shares, debt securities, bank deposits etc.

1. Fair Value loss of a FA is usually a temporary decrease in the market value of the FA which could subsequently reverse if the market conditions change in favour of the instrument.

The treatment is based on the classification of the financial asset in line with IFRS 9 at initial recognition.

Treatment:

i. For FAs classified as fair value through profit or loss (FVTPL)

Debit: P or L

Credit: FA

ii. For FAs classified as fair value through other comprehensive income (FVOCI):

Debit: OCI

Credit: FA

iii. There is no fair value recognition on FAs classified as Amortized Cost at initially recognition. Any fair value should be disclosed by way of notes to the financial statements.

Note: the reverse treatment applies to a fair value gain on FAs.

2. Impairment Loss on financial asset is usually of a permanent nature and it means a diminution in the value of the asset. Impairment arises when the fair value fall short of the recoverable value of an asset (in this case FAs).

Treatment:

i. FAs classified as FVTPL : No impairment is recognised because it is believe that any impairment would have been taken care of as fair value loss and charged to Prifit or loss.

ii. FAs classified as FVOCI:

Debit: Profit or loss

Credit: FA

iii. FAs classified as AC:

Debit: Profit or loss

Credit: FA

Note 1: Reverse treatment applies to impairment gain (i.e. reversal of a previously recognised impairment loss).

Note 2: Impairment loss on equity investment cannot be reversed. Hence, in the assessment of impairment, one must ensure that it is of a permanent nature and if it is not of a permanent nature, it should be treated as fair value loss in the OCI because this can subsequently reverse when market conditions improve.

Recall that this is similar to treatment of impairment of goodwill acquired in a business combination. Reversing impairment on a goodwill is tantamount to recognising internally generated goodwill which IAS 38 seriously frowns at.