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 earlier model used to be ‘incurred credit loss model’ which is criticised on the grounds that it is ‘too little and too late’.

As per the new requirement, it is no longer necessary for a credit event to have occurred before credit losses are recognised. As per the revised requirements, an entity should always account for the expected credit losses and changes in those expected credit losses. The amount of expected credit losses is computed at each reporting period to reflect changes in the credit risk since initial recognition. This is expected to provide more timely information about the expected credit losses. This estimation about the expected credit losses happens when the financial asset is first originated. For the purpose of measuring the expected credit losses, the entity should use all relevant information available, of course, without undue cost or effort. The effect of this requirement is that for the purpose of considering the expected credit losses the entity should use not only the historical losses and other relevant current information, but should also apply judgments in using reasonable and supportable forward looking information. This is a marked change from the previous requirements where the impairment losses were considered based on the incurred credit losses without considering any forward-looking information available with the entity.

What are the three stages of impairment loss

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 …
Read More

Impairment model for different categories of financial assets

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 …
Read More

Impairment for debt instruments classified as FVOCI

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 …
Read More

Loss allowance as per Ind AS 109

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 …
Read More

Impairment loss allowance on performing assets

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 …
Read More

Treatment of collateral value for expected credit losses

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 …
Read More

Recognition of interest revenue during all three stages

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 …
Read More

Credit adjusted effective interest rate

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 …
Read More

Subscribe to our News Letter

Get periodical updates from us

Subscribe to our News Letter

I hope you enjoy reading this blog

Scroll to Top