A UK company (which accounts to 31 December) holds, as an
investment, sterling-denominated corporate bonds of par value
£2 million, which are traded on an active market. They mature
on 30 June 2008, and carry a 7.5% coupon. The company bought the
bonds in the market on 1 July 2005 for £2,080.000. The yield
to maturity is 6.0035%.
The amortisation table is therefore:
| Period to | P&L credit | Interest receivable | Amortisation | Carrying value on amortised cost basis |
| Initial recognition | 2,080,000 | |||
| 31/12/05 | 62,436 | 75,000 | (12,564) | 2,067,436 |
| 31/12/06 | 124,118 | 150,000 | (25,882) | 2,041,554 |
| 31/12/07 | 122,564 | 150,000 | (27,436) | 2,014,118 |
| 30/06/08 | 60,458 | 75,000 | (14,452) | 1,999,576 |
The company has not the positive intention of holding these
bonds to maturity, and so accounts for them as an available for
sale asset. At 31 December 2005, the fair value of the bonds is
£2,071,000.
The yield on the bonds is credited to profit and loss each
year. The P&L credit contains two components – the
interest receivable (a credit) and amortisation of the premium over
par value at which the bonds were purchased (a debit). Between 1
July and 31 December 2005, the fair value of bonds decreases by
£9,000: however, deducting from this the £12,564
amortisation already debited to P&L, there is a fair value
increase of £3,564 that is taken to equity.
In year ended 31 December 2006, the company that issued the
bonds issues a profits warning. At the year end, the bonds are
trading at 101.50, so the market value of the holding is
£2,021,000, less than the amortised cost. Since the bonds are
traded on an active market, this provides objective evidence of
impairment. The fair value has fallen by £50,000 during the
year. This breaks down to:
However, because the asset is impaired, an impairment loss is
"recycled" from equity and recognised in P&L. IAS 39 specifies
that the amount of the loss is the difference between the
acquisition cost, net of any principal repayment and amortisation
(in other words, the carrying value on an amortised cost basis) and
the current fair value. In this case, the impairment loss is
£2,041,554 - £2,021,000 = £20,554. This amount is
debited to P&L. The remainder of the fair value decrease,
£3,564, is taken to equity, reversing the previous credit.
In 2007, the fortunes of the issuing company improve, and at
31 December 2007 the fair value of the bond is £2,015,000. The
fair value, net of the £27,436 amortisation debited to
P&L, has increased by £21,436. This increase can be
objectively related to events occurring after recognition of the
impairment debit.
The company therefore takes £20,554 to P&L in year
ended 31 December 2007, reversing the impairment debit. The
remaining £882 of the fair value increase is credited to
equity.
