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 the financial asset becomes credit impaired, interest revenue would be recognised in the amortised cost which is the carrying value as reduced by the impairment loss allowance.