11-21-2008, 08:37 PM
Dear Kamran,
Thank you very much for your detailed reply. In fact my thoughts on this issue were pretty much the same as you mentioned except for one difference. I believe that the standard (IAS 39) does not permit the reversal of previously recognized impairment losses on equity instruments classified as available for sale. Therefore, all the fair value increase should be recognized directly in the fair value reserve (in equity), even though the company has previously recorded an impairment loss. As you mentioned a disclosure will be required for the subsequent market conditions as non adjustable event.
Regarding the impairment I agree with you to the extent that a temporary decline in the fair value or suspension of active trading cannot be an evidence of impairment, however, para 61 of the standard highlights that a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also an objective evidence of impairment. Now what is âsignificantâ and âprolongedâ is again a subjective issue. There are some country specific guidelines on this, usually issued by the Central banks which establishes a threshold (for instance more than 20% decline below cost as significant & a decline for more than 6 months as Prolonged), but again these may not necessarily be accurate. The point you mentioned about the undervaluation of Nishat Mills probably is the result of market inefficiency, I believe. If the market is efficient (which is the assumption for most of the Accounting Principles), then the market value of a share is the best forecast of the fair value of that company.
Don't worry about the advisory bills....just as the doctors don't usually charge each other for fee, the practicing professionals of our community should also follow.....what do you think...thanks again for your participation.
Regards,
Thank you very much for your detailed reply. In fact my thoughts on this issue were pretty much the same as you mentioned except for one difference. I believe that the standard (IAS 39) does not permit the reversal of previously recognized impairment losses on equity instruments classified as available for sale. Therefore, all the fair value increase should be recognized directly in the fair value reserve (in equity), even though the company has previously recorded an impairment loss. As you mentioned a disclosure will be required for the subsequent market conditions as non adjustable event.
Regarding the impairment I agree with you to the extent that a temporary decline in the fair value or suspension of active trading cannot be an evidence of impairment, however, para 61 of the standard highlights that a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also an objective evidence of impairment. Now what is âsignificantâ and âprolongedâ is again a subjective issue. There are some country specific guidelines on this, usually issued by the Central banks which establishes a threshold (for instance more than 20% decline below cost as significant & a decline for more than 6 months as Prolonged), but again these may not necessarily be accurate. The point you mentioned about the undervaluation of Nishat Mills probably is the result of market inefficiency, I believe. If the market is efficient (which is the assumption for most of the Accounting Principles), then the market value of a share is the best forecast of the fair value of that company.
Don't worry about the advisory bills....just as the doctors don't usually charge each other for fee, the practicing professionals of our community should also follow.....what do you think...thanks again for your participation.
Regards,