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Some characteristics of an equity security next-year impairment

Author

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  • Julien Azzaz
  • Stéphane Loisel
  • Pierre-E. Thérond

Abstract

In this paper, we propose some characteristics of next-year impairments in a generic Black and Scholes framework, with one equity security, and under International Financial Reporting Standards (IFRS) rules. We derive expression for the probability of impairment event for an equity-security recognized in the available-for-sale category. Our decomposition of this event is also useful to retrieve barrier options valuation methods. From there, we obtain an explicit formula for the first moment of impairment value and its cumulative distribution function, as well as sensitivities. Numerical studies are carried out on concrete securities. We also study a mean-preserving one-criterion proxy used by some insurance practitioners for the next-year impairment losses and discuss its relevance. More generally, our study paves the way for applications of financial mathematics techniques to accounting issues related to impairments in the IFRS framework. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Julien Azzaz & Stéphane Loisel & Pierre-E. Thérond, 2015. "Some characteristics of an equity security next-year impairment," Review of Quantitative Finance and Accounting, Springer, vol. 45(1), pages 111-135, July.
    • Handle: RePEc:kap:rqfnac:v:45:y:2015:i:1:p:111-135
    DOI: 10.1007/s11156-014-0432-x
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    References listed on IDEAS

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    1. P. Carr, 1995. "Two extensions to barrier option valuation," Applied Mathematical Finance, Taylor & Francis Journals, vol. 2(3), pages 173-209.
    2. Chuang, Chin-Shan, 1996. "Joint distribution of Brownian motion and its maximum, with a generalization to correlated BM and applications to barrier options," Statistics & Probability Letters, Elsevier, vol. 28(1), pages 81-90, June.
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    4. Bikki Jaggi & James P. Winder & Cheng-Few Lee, 2010. "Is There a Future for Fair Value Accounting After the 2008–2009 Financial Crisis?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 13(03), pages 469-493.
    5. Laux, Christian & Leuz, Christian, 2009. "The crisis of fair-value accounting: Making sense of the recent debate," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 826-834, August.
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    Cited by:

    1. Diana Dorobantu & Yahia Salhi & Pierre-E. Thérond, 2020. "Modelling Net Carrying Amount of Shares for Market Consistent Valuation of Life Insurance Liabilities," Methodology and Computing in Applied Probability, Springer, vol. 22(2), pages 711-745, June.
    2. Achim Luminita-Georgiana & Mitoi Elena & Turlea Ioan-Codrut, 2021. "A methodological approach to developing and validating IFRS 9 -LGD parameters," Proceedings of the International Conference on Business Excellence, Sciendo, vol. 15(1), pages 683-694, December.
    3. Pierre-Emmanuel Thérond, 2014. "Alarm System for Credit Losses Impairment under IFRS 9," Post-Print hal-01152097, HAL.
    4. Diana Dorobantu & Yahia Salhi & Pierre-Emmanuel Thérond, 2018. "Modelling net carrying amount of shares for market consistent valuation of life insurance liabilities," Working Papers hal-01840057, HAL.

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