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.

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 …
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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 …
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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 …
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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 …
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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 …
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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 …
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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 …
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New impairment methodology

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 …
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