FAQs – Impairment of Financial Instruments

Impairment model for different categories of financial assets Is the impairment model different for different categories of financial assets? No. Ind AS 109 has a single impairment model that applies to all financial instruments within its scope. As per the previous version of IFRS 9, viz, IAS 39, there were different models for assets classified as held-to-maturity, available-for-sale debt instruments and available for sale equity instruments and equity instruments measured at fair value through profit or loss. Impairment on account of loan commitments and financial guarantee contracts were accounted for under IAS 37. However, the impairment loss now is aligned…

Impairment for debt instruments classified as FVOCI Is impairment testing necessary for debt instruments classified as fair value through other comprehensive income? Debt instruments that are classified as fair value through other comprehensive income are also subjected to impairment test. This is because while the financial asset classified as FVOCI is shown in the balance sheet at fair value, the changes in the fair value of such instruments are taken to the other comprehensive income. Fair valuing a debt instrument does not consider the impairment of the instrument. Fair value of a debt instrument is arrived at by discounting of…

Loss allowance as per Ind AS 109 Can an entity provide a loss allowance greater than the impairment loss allowance as per Ind AS 109? Previously entities used to provide for losses on certain financial assets on an ad hoc basis that means several practices which are now prohibited expressly as per the new impairment requirements of Ind AS 109. Now it is not possible to provide for impairment loss based on a pre-defined percentage of accounts receivable recognised on an ad hoc basis. The absolute value or pre-defined percentage of expected cash short fall on a non performing asset…

Impairment loss allowance on performing assets Should impairment loss allowance be provided on performing assets or standard assets at the time of recognition of such assets? The expected credit loss is required to be applied on day one for all types of financing assets. The expected credit losses are the present value of all cash short falls over the expected life of the financial instrument. The credit loss is the difference between all contractual cash flows that are due to an entity as per the contract and all the cash flows that the entity expects to receive, discounted at the…

Presentation of impairment loss for debt instruments at FVOCI How is impairment loss presented in the balance sheet and profit and loss account in respect of debt instruments measured at FVOCI? For financial assets that are debt instruments measured at FVOCI, both the amortised cost and the fair value of the instrument are relevant. The reason for this is the objective of categorising a debt instrument as FVOCI is that both the contractual cash flows characteristic and the fair value of the instrument are relevant as the asset is held to receive contractual cash flows as well as to buy…

Treatment of collateral value for expected credit losses How should the value of collateral be treated while measuring expected credit losses? For the purpose of measuring expected credit losses, the estimate of expected cash shortfalls shall reflect the cash flows expected from collateral and other credit enhancements that are part of the contractual terms and are not recognised separately by the entity. The estimate of expected cash shortfalls on a collateralised financial instrument reflects the amount and timing of cash flows that are expected from foreclosure on the collateral less the costs of obtaining and selling the collateral, irrespective of…

Recognition of interest revenue during all three stages How is interest revenue recognised for a financial asset during all the three stages? Interest revenue is always recognised based on the effective interest rate. The effective interest rate is applied on the opening carrying value of a financial asset. Impairment loss, if any, at this stage will not be reduced from the carrying value while computing the interest revenue in the second stage when the credit risk increases significantly. Interest revenue again is recognised on the opening carrying value of the financial asset before adjusting the impairment loss allowance. However, when…

Credit adjusted effective interest rate What is meant by credit adjusted effective interest rate? The credit adjusted effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial asset to the amortised cost of a financial asset that is a purchased or originated credit-impaired financial asset. When calculating the credit-adjusted effective interest rate, an entity shall estimate the expected cash flows by considering all contractual terms of the financial asset (for example, prepayment, extension, call and similar options) and expected credit losses. The calculation includes all fees and…

New impairment methodology What is the new impairment methodology? Is this concept entirely new? Yes. The new impairment methodology is completely new and this is the one instance where the accounting bodies on both sides of the Atlantic agreed to disagree. The bone of contention as far as the US GAAP is concerned, is relating to the reversal of impairment loss. The new impairment methodology is expected to act more like a whistle blower so as to caution the entity of the impending loss that could arise on account of a financial asset over the life of such asset. The…

What are the three stages of impairment loss What are the three stages during which the impairment loss should be provided? At the first stage, a portion of the expected credit loss is recognised on day one for all financial assets. This is calculated as the present value of cash short falls occurring over the entire life of the asset with the weighted probability of the default happening over the next 12 months. The cash short falls represent the difference between the expected contractual cash flows as reduced by the expected cash flows. During this stage, the interest revenue is…