Final answer:
To account for the impairment of held-to-maturity debt security, compare the current fair value to its amortized cost basis and record an impairment loss if the fair value is less. This loss is measured by the present value of expected future cash flows, discounted at the security's original rate, impacting the income statement but not adjusting the new cost basis upward for value recoveries.
Step-by-step explanation:
To account for the impairment of held-to-maturity debt security, companies must evaluate if the debt security is impaired, which typically involves comparing the current fair value of the debt security with its amortized cost basis. If the fair value is less than the amortized cost, an impairment may exist. This assessment should be done at each reporting period to reflect accurate financial information.
If an impairment is identified, the amount of impairment loss is measured as the difference between the debt security's amortized cost basis and the present value of its anticipated future cash flows, discounted at the security's original effective interest rate. The impairment loss is then recognized in the income statement, and a new cost basis for the security is established, which is not adjusted upward for subsequent recoveries in fair value but may be adjusted for amortization.
For example, when interest rates increase, the fair value of a bond may decline below its amortized cost. In a simplified scenario, if a bond was originally purchased for $1,000 and is now worth $900 due to higher interest rates, and the entity intends to hold the bond to maturity, the entity would record an impairment loss of $100 in the income statement.