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.
Indicators 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 18.104.22.168)|