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 recognised based on the gross carrying value of the financial asset by applying the effective interest rate.

In the second stage – during subsequent reporting periods – the financial instrument is assessed to find out if there has been a significant increase in the credit risk since it was first acquired. If so, the impairment loss is recognised as the present value of cash short falls occurring over the entire life of the asset with the probability weighted default occurring over the entire life of the asset. In this stage also, interest revenue is recognised based on applying the effective interest rate to the gross carrying value of the asset. In the third stage when an apprehended credit event occurs and the financial asset actually becomes credit impaired, the impairment loss is computed in the same way as in stage two. However, the interest revenue in this stage is recognised by applying the effective interest rate to the amortised cost of the financial asset which is the gross carrying value as reduced by the impairment loss allowance.

Ind AS Accounting Standards