During an IFRS 9 modelling assignment at one of our clients, a financial institution; the Head of Credit asked; “summitIFRS 9 team, how should the bank impair financial assets that are credit impaired after the initial recognition?”
To answer the Head of Credit, we referred to paragraph 5.5.13 of the IFRS 9 Standard provides guidance on how to impair purchased or originated credit-impaired financial assets and example 1 explained.
Consider the example 1: asset that has become credit-impaired after initial recognition
On 1 January 2017, SACCO A lends Ugx100 million to local manufacturing company ABC Ltd. Under the contractual terms, BB Ltd should repay the loan on 31 December 2020 by paying Ugx1,500,000. There are no payments required between these dates, which gives the effective interest rate (EIR) at 10.7%. SACCO A estimates the 12-month ECL at initial recognition at Ugx 200,000.
On 1 January 2018, the financial situation of ABC Ltd deteriorates significantly and SACCO A considers its loan to ABC as credit-impaired (stage 3). It now estimates to receive only Ugx1,106,682 00,000 on 31 December 2018 (the same repayment date). The estimated credit loss (ECL) at repayment date is therefore Ugx 737,788 which, discounted using the original EIR of 10.7%, gives a present value of ECL at 816,497 as of 1 January 2019. The accounting schedule for this bond is presented below.
All calculations presented in this example are available for download in excel format.