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HMRC internal manual

Corporate Finance Manual

Accounting for corporate finance: International Financial Reporting Standards: IAS 39: measurement of financial assets: impairment: example

A company that manufactures garden tools and horticultural products regularly makes loans to retailers in order to facilitate the retailer stocking its latest products and buying appropriate advertising and display material. None of the loans is individually significant. The company makes an internal evaluation of the credit risk (high, medium or low) when the loan is advanced, and groups the loans by credit risk, by broad geographical location of the borrower and by type of retailer (garden centre, ironmonger, agricultural equipment specialist, etc).

At its year end, the company assesses each group for impairment. It must decide whether there is observable data indicating a measurable decrease in future cash flows from the group. It will take into account such factors as whether there is an increase in the number of borrowers who are late in making interest payments. It may also take into account changes in economic conditions (for example, if it knows that garden centres in the north of England are doing badly) where these are known to correlate with defaults on the loans. It can use a formula or statistical approach to assess the amount of the impairment provided this accords with the general approach of IAS 39.

During the year, the company receives notification from an insolvency practitioner that retailer X has gone into liquidation. It must remove the loan to X from its group and make a separate assessment of the degree to which the debt is impaired.