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Loan Impairment

14 December 2008 3,733 views No Comment
Is there any guideline for measurement of loan impairment and recognition of interest income by using effective rate method

Asim


well Esther the UK leads the path i.e. the UK tax authorities are the only ones in Europe which accept IFRS reporting to the extent that its website http://www.hmrc.gov.uk/ does have a section allocated to differences between IFRS and UK GAAP

I wish in Germany they had the same thing!!!!!



 

Asim
 
Below is the list of applicable paragraphs from IAS 39 for measurement of loan impairment:
 

                 Financial assets carried at amortized cost

63 If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortized cost has been incurred the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (ie the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of the loss shall be recognized in profit or loss.
[Refer: paragraphs AG84–AG93  Implementation Guidance Questions E.4.3–E.4.7]

64 An entity first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If an entity determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.
[Refer: paragraphs AG87–AG92 - Basis for Conclusions paragraphs BC111–BC124  - Implementation Guidance Questions E.4.6 and E.4.7]

65 If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss shall be reversed either directly or by adjusting an allowance account. The reversal shall not result in a carrying amount of the financial asset that exceeds what the amortized cost would have been had the impairment not been recognized at the date the impairment is reversed. The amount of the reversal shall be recognized in profit or loss.
Financial assets carried at cost

66 If there is objective evidence that an impairment loss has been incurred [on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset (see paragraph 46(c) and Appendix A paragraphs AG80 and AG81). Such impairment losses shall not be reversed.
 

                Refer: Basis for Conclusions paragraphs BC108–BC110]

Available-for-sale financial assets

67 When a decline in the fair value of an available-for-sale financial asset has been recognized directly in equity and there is objective evidence that the asset is impaired (see paragraph 59), the cumulative loss that had been recognized directly in equity shall be removed from equity and recognized in profit or loss even though the financial asset has not been derecognized.
[Refer also: paragraphs 60–62  Implementation Guidance Questions E.4.9 and E.4.10]

68 The amount of the cumulative loss that is removed from equity and recognized in profit or loss under paragraph 67 shall be the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that financial asset previously recognized in profit or loss.

69 Impairment losses recognized in profit or loss for an investment in an equity instrument classified as available for sale shall not be reversed through profit or loss.
[Refer: Introduction paragraph IN22 - Basis for Conclusions paragraphs BC125, BC126, BC129 and BC130 IFRIC 10]

70 If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognized in profit or loss.
[Refer: Basis for Conclusions paragraphs BC125–BC127

 

Antonello

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