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Written By:Neshelle Bailey
Due to current conditions many securities have declined in market value. The big question is how do you know if this
decline is other than temporary and considered impaired. The Financial Accounting Standards Board has issued guidance about
the steps to take to determine if an investment is other than temporarily impaired. The following is a summary of those
steps.
- Step 1: Identify Impairment
An investment is impaired if its fair value is less than its carrying value.
- Step 2: Impairment Other than Temporary
The fair value of individual investment securities may decline below cost for various reasons. Declines in value
require further investigation by management, who should consider all available evidence to evaluate the realizable value
of its investment. Numerous factors should be considered in such an evaluation and their relative significance will vary
from case to case. The following are a few factors which should be evaluated to determine if a decline is other than
temporary and a write-down to fair value is required:
- The length of time and the extent to which fair value has been less than cost;
- The financial condition and near-term prospects of the issuer, including any specific events that
may influence the operations of the issuer, such as changes in technology that may impair its earnings
potential or the discontinuance of a segment of the issuer's business that may affect its future earnings
potential; or
- The intent and ability of the investor to retain its investment for a period of time sufficient to allow
for any anticipated recovery in fair value.
- Step 3: Recognition
The loss recognized from an other than temporary impairment loss should equal the difference between the
investment's carrying value and its quoted market price or, if that is unavailable, another measure of fair value. This
establishes a new cost basis for the investment. Subsequent recoveries in fair value should not be added to the new cost
basis of the investment. A recovery in fair value should not be recognized in earnings until the investment is
subsequently sold.
Contact Nichols,
Cauley & Associates by Email,
phone, or online
form with your questions.
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