Purchased and originated credit-impaired financial assets – IFRS 9 Best Read

Purchased and originated credit-impaired financial assets

Purchased and originated credit-impaired financial assets are those for which one or more events that have a detrimental impact on the estimated future cash flows have already occurred. If these financial assets had been originated or purchased before becoming credit impaired, they would be in Stage 3 and lifetime expected losses would be recognised.

Purchased and originated credit-impaired financial assetsIndicators that an asset is credit-impaired would include observable data about the following events:

  • Significant financial difficulty of the issuer or the borrower
  • Breach of contract,
  • The lender has granted concessions as a result of the borrower’s financial difficulty which the lender would not otherwise consider,
  • It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation,
  • The disappearance of an active market for that financial asset because of financial difficulties,
  • The financial asset is purchased or originated at a deep discount that reflects the incurred credit losses.

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

Food for thought – Interaction between definitions of ‘credit-impaired’ and ‘default’
The definition of ‘credit-impaired’ under IFRS 9 may differ from the entity’s definition of ‘default’ (see explanation here). However, an entity’s definition of default should be consistent with its credit risk management, and should consider qualitative factors. For example, many financial institutions apply regulatory definitions of default for accounting and regulatory purposes – e.g. those issued by the Basel Committee on Banking Supervision under which a default is considered to have occurred when it is unlikely that the obligor will be able to repay its obligation. The assessment of whether such a definition is met may be based on similar criteria to those used for assessing whether an asset is credit-impaired. In these cases, the asset would be considered to be in default when it is credit-impaired. (IFRS 9.5.5.37)

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IFRS 9 The Business Model Test

is a necessary condition (see IFRS 9 Classification and Measurement of Financial Instruments) for classifying a loan or receivable Read more

The important Solely Payments of Principal and Interest Test for IFRS 9

The important Solely Payments of Principal and Interest Test

IFRS 9 The is the second necessary condition (see IFRS 9 Classification and Measurement of Financial Instruments) for classifying loans and receivables at Amortized Cost, Fair Value through Other Comprehensive Income (FVOCI), or the Fair Read more

Cash flows identification Only Principal and interest

Cash flows identification Only Principal and interestCash flows identification Only Principal and interest – Cash flows solely payments of principal and interest on the principal amount

The following examples illustrate contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. For the context within IFRS 9: Financial Instruments, reference is made to IFRS 9 The Read more

Cash flows identification Not-Only Principal and interest

Cash flows identification Not-Only Principal and interestCash flows identification Not-Only Principal and interest – The following examples illustrate contractual cash flows that are not solely payments of principal and interest on the principal amount outstanding. For the context within IFRS 9: Financial Instruments, reference is made to IFRS 9 The Solely Payments of Principal and Interest Test .

This list of examples is not exhaustive:

Instrument

Analysis

Instrument F

Instrument F is a bond that is convertible into a fixed number of equity instruments of the issuer.Third party services

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The holder would analyse the convertible bond in its entirety.

The contractual cash flows are not payments of principal and interest on the principal amount outstanding because they reflect a return that is inconsistent with a basic lending

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IFRS 9 The SPPI test explained by example

IFRS 9 The SPPI test explained by example

 The solely payments of principal and interest (SPPI) test requires that the contractual terms of the financial asset (as a whole) give rise to cash flows that are solely payments of principal and interest on the principal amounts outstanding ie cash flows that are consistent with a basic lending arrangement. 

In this case, interest is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time.

In order to meet this condition, there can be no leverage of the contractual cash flows. Leverage increases the variability of the contractual cash flows with the result that they … Read more

Changes in contractual provisions

Changes in contractual provisions – How do you account for contractual provisions in a financial instruments contract that change the timing or amount of contractual cash flows?

Contractual cash flows of some financial assets may change over their lives. For example, an asset may have a floating interest rate. Also, in many cases an asset can be prepaid or its term extended. [IFRS 9 B4.1.10, IFRS 9 B4.1.12] Changes in contractual provisions

For such assets, an entity determines whether the contractual cash flows that could arise over the life of the instrument meet the SPPI criterion. It does so by assessing the contractual cash flows that could arise both before and after the change in contractual cash Read more

Instruments that may fail the SPPI test

Instruments that may fail the – Careful consideration and a documented decision regarding the Solely Payment of Principal and Interest test is needed in the following cases:Instruments that may fail the SPPI test

[IFRS 9 B4.1.13, IFRS 9 BC4.186, IFRS 9 BC4.190]

Instruments that may fail the Read more

Instruments that failed the SPPI test

Instruments that failed the – The following financial instruments in IFRS 9 have be carefully judged by the IASB and fail(ed) the Solely Payment of Principal and Interest test.

[IFRS 9 B4.1.9D, IFRS 9 B4.1.14] Instruments that fail(ed) the Read more

Do the SPPI contractual cash flow characteristics test

Do the SPPI test summarises the classification of financial assets. A typical example of an instrument where the contractual cash flows would not meet SPPI would be a Read more