Modifications and Write-offs Financial assets

Modifications Modifications and Write-offs Financial assets

If the contractual cash flows of a financial asset are modified or renegotiated in such a way that does not result in derecognition of that financial asset under IFRS 9 Financial Instruments, entities should recalculate the gross carrying amount of the financial asset on the basis of the renegotiated or modified contractual cash flows. A modification gain or loss would be recognised in profit or loss. Modifications and Write-offs Financial assets

An entity would also be required to consider whether the modification (renegotiation) provides evidence that there may have been a significant increase in credit risk. It is necessary to compare:

  • The credit risk at the reporting date (based on the modified contractual terms), and Modifications and Write-offs Financial assets
  • The credit risk at initial recognition (based on the original, unmodified contractual terms).

If there has been a significant increase in credit risk, the modified financial Modifications and Write-offs Financial assetsinstrument would be in Stage 2, and lifetime expected credit losses would be required to be recognised.

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If subsequently, credit risk is considered to have decreased after the modification e.g. the customer has demonstrated consistent good payment behavior over a period of time then the modified financial instrument might move back to Stage 1 ( and 12-month expected credit losses).

Write-offs Modifications and Write-offs Financial assets

When the entity has no reasonable expectations of recovery, a write-off event occurs. A write-off constitutes a derecognition event (either in full or in part). [IFRS 9 5.4.4] Therefore the gross carrying amount of a financial asset is reduced by the amount of the write-off that has been recognised in profit or loss. If a carrying amount remains, this should be the basis for which interest income is calculated. In addition, IFRS 7 requires an entity to disclose its policies in relation to write-offs and also to, the amounts written off during the period that are still subject to enforcement activity.


An entity plans to enforce the collateral on a financial asset and expects to recover no more than 30%. If the entity has no reasonable prospects of recovering any further cash flows from the financial asset, it writes off the remaining 70% of the financial asset.

IFRS 9 does not specify exactly when an asset is written off (ie derecognised). The principle is however that a write-off occurs when there is ‘no reasonable expectation’ of recovering either the entirety or a portion of an asset’s
contractual cash flows. Write-offs can relate to an entire asset or to part of it. Modifications and Write-offs Financial assets

In practice many entities will need to develop a write-off policy that is appropriate to their circumstances and to the different types of assets they hold. Entities with relatively few financial assets might determine write-offs on a case-by-case basis. Modifications and Write-offs Financial assets

An appropriate write-off policy is important in order to avoid ‘grossing-up’ financial assets and related loss reserves when the assets are uncollectible. Modifications and Write-offs Financial assets

Write-offs will also be important when analysing historical credit losses. This is because entities need to determine the point at which assets become uncollectible in order to determine past loss rates.

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Modifications and Write-offs Financial assets

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