The International Accounting Standards Board (IASB) is proposing the use of the expected loss model to determine impairment losses for financial assets measured using the cost or amortized cost basis. Currently, the incurred Joss model is used under IFRS and ASPE.
An entity has made an investment in a debt instrument that is for $1 million and will pay interest at 5% for the next five years until2019. The investment is bought at par, and the effective interest rate is 5%, assuming no future credit losses. In determining expected future credit losses, the effective interest rate incorporating these future expected credit losses is only 4.2%.
Instructions
Using the facts from the example above, compare and contrast the expected loss model and the incurred loss model with respect to the following issues:
(a) How is the debt investment initially recorded and the effective rate of interest determined?
(b) When is the impairment loss measured?
(c) How is the revised carrying amount measured? Where is the impairment loss recorded?
(d) When are reversals of the impairment determined and reported?