Some characteristics of an equity security next-year impairment

Some characteristics of an equity security next-year impairment 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Some characteristics of an equity security next-year impairment

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Publisher
Springer US
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-014-0432-x
Publisher site
See Article on Publisher Site

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.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Feb 7, 2014

References

  • The value relevance of IFRS in the European banking industry
    Agostino, M; Drago, D; Silipo, DB
  • Interest tax shields: A barrier options approach
    Couch, R; Dothan, M; Wu, W

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