Credit-impaired financial asset

Credit-impaired financial asset

A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include observable data about the following events:

  1. the significant financial difficulty of the issuer or the borrower; Credit-impaired financial asset
  2. a breach of contract, such as a default or past due event; Credit-impaired financial asset
  3. the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider; Credit-impaired financial asset
  4. it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; Credit-impaired financial asset
  5. the disappearance of an active market for that financial asset because of financial difficulties; or Credit-impaired financial asset
  6. the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses. Credit-impaired financial asset

It may not be possible to identify a single discrete event—instead, the combined effect of several events may have caused financial assets to become credit-impaired.

When a financial asset becomes credit-impaired, IFRS 9 5.4.1(b) requires an entity to calculate interest revenue by applying the effective interest rate to the amortised cost of the financial asset, i.e. the (original) gross amount less expected credit losses. This results in a difference between (a) the interest that would be calculated by applying the effective interest rate to the gross carrying amount of the credit-impaired financial asset, and (b) the interest revenue recognised for that asset. Credit-impaired financial asset

If a financial asset ‘cures’, so that it is transferred back to stage 2 or stage 1, interest revenue would once again be recognised based on the gross carrying amount. As a result, an entity recognises the adjustment required to bring the loss allowance to the amount required to be recognised in accordance with IFRS 9 as a reversal of expected credit losses ECLs in profit or loss and not as interest revenue [IFRS 9 5.5.8]. Credit-impaired financial asset

The allowance would be reversed to zero if the asset is recovered in full. The amount of this adjustment includes the effect of the unwinding of the discount on the loss allowance during the period that the financial asset was credit impaired. Ultimately, the reversal of impairment losses may exceed the impairment losses recognised in profit or loss over the life of the asset if amounts collected exceed the expected cash flow losses. Credit-impaired financial asset

Credit-impaired financial asset

Credit-impaired financial asset

The allowance would be reversed to zero if the asset is recovered in full. The amount of this adjustment includes the effect of the unwinding of the discount on the loss allowance during the period that the financial asset was credit impaired. Ultimately, the reversal of impairment losses may exceed the impairment losses recognised in profit or loss over the life of the asset if amounts collected exceed the expected cash flow losses. The allowance would be reversed to zero if the asset is recovered in full.

The amount of this adjustment includes the effect of the unwinding of the discount on the loss allowance during the period that the financial asset was credit impaired. Ultimately, the reversal of impairment losses may exceed the impairment losses recognised in profit or loss over the life of the asset if amounts collected exceed the expected cash flow losses.

The allowance would be reversed to zero if the asset is recovered in full. The amount of this adjustment includes the effect of the unwinding of the discount on the loss allowance during the period that the financial asset was credit impaired. Ultimately, the reversal of impairment losses may exceed the impairment losses recognised. Credit-impaired financial asset Credit-impaired financial asset Credit-impaired financial asset

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