Accounting Studies On Impairment Of Financial Instruments

The impairment of financial instruments is designed to measure the disadvantageous change of its credit quality. Under the current model, impairment can’t be confirmed without the existence of objective evidence of impairment, despite the fact that relevant information of future credit quality changes already exists. This method of measure has overlooked the accounting information without faithful representation of the actual situation of financial instruments, which indicts the fact that the current financial instruments impairment criteria don’t conform to the requirements of the accounting measurement. In practice, the price of financial instruments would therefore fall sharply, which creates so-called cliff effects. The effects are particularly evident especially during the financial crisis. Investors have no timely access to information of credit quality changes, causing the practice inconvenience. So the study on financial instruments impairment is of great significance in both theory and practice aspects. Base on this fact, this paper focuses on the topic of financial instruments impairment. By comparing the successive improvement methods, I think the expected loss model which considers future expected losses in accordance with the requirements for accounting concept, conforms to the amortized cost measurement concept. For further research, I explain the discussion that expected loss model of accounting measurement is for the past or the future and the match between accounting earnings and future costs. Finally, I come to the conclusion that accounting measurement does not simply for the past, the expected loss is the accumulation process of the quantitative changes as well as the cost of quantitative changes, conforming to the principle of equivalence.After exploring the feasibility of expected loss model theory, I put forward suggestions for its future development with the discussion of time and quantity confirmation and the relationship between interest income and expected losses in IASB and FASB drafts for clues. In this paper,1suggest the adoption of FASB unified expected loss estimation and the impairment approach applicable to all financial instruments, which can reduce the cliff effects in different accounts transformation. The expected loss of the remaining life cycle should be initially recognized so that impairment balance can completely reflect expected losses in the future. I also agree the opinion in IASB that initial pricing should consider expected losses, so I suggest the addition of equal number of holding value to initial confirmation, thus avoiding the double reorganization of expected losses. Because expected losses include the possibility that future interest related cash flow cannot be brought back, I agree with the IASB advice, interest income shall be determined by the real interest rate after credit adjustment to amortize the expected losses contained in the contract.For the balance of theoretical development and the operation convenience, I come out the gaps in default risk exposure, default probability, default loss rate and search the actually possible ways of using the expected loss model by comparing the credit risk impairment model in prudential supervision and expected loss model. What’s more, I introduce the application of migration model of expected loss in enterprise not fully adopt the prudential supervision model by way of example. Special attention on the adjustment of data and sufficient information disclosure should be paid when using the method.Back to the practice in our country, I make analysis on real challenges when adopting the model considering both internal and external enterprise environment, and put forward improvement suggestions on optimizing the market environment, promoting the coordination between accounting supervision and other regulatory, taking the transitional measures for reporting entities.Because of my limited research level, certain subjective color is contained in understanding and analysis of expected loss model. Besides, the lack of practical experience in accounting and model test data also restrict the model. The practice test is still essential in discussions of future development suggestions and practical possible ways speculation.