Return to 12-month losses

Learning objectives

• Determine the return to 12-month expected credit losses when the significant increase condition is no longer met, and the presentation of the interest difference after a credit-impaired asset is cured.L3
• Record the journal entries for the return to 12-month expected credit losses after an improvement and measure their effect on the financial position, profit or loss and other comprehensive income.L3

Normative references

• IFRS 9 §5.4.2When the entity was calculating interest revenue on the amortised cost under para. 5.4.1(b), it reverts, in subsequent reporting periods, to applying the effective interest rate to the gross carrying amount if the credit risk improves so that the asset is no longer credit-impaired and the improvement can be related objectively to an event occurring after para. 5.4.1(b) was applied, such as an improvement in the borrower's credit rating.
• IFRS 9 §5.5.7If, at a previous reporting date, the loss allowance was measured on a lifetime basis but the significant increase condition is no longer met at the current reporting date, it is measured again on a 12-month basis.
• IFRS 9 §5.5.8The amount of expected credit losses (or reversal) required to adjust the loss allowance at the reporting date is recognised in profit or loss as an impairment gain or loss. Linking to this paragraph the presentation, after cure, of the interest difference derives from the Interpretations Committee decision of March 2019.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• At 31 December N-1, Ion SA measured the loss allowance of a loan on a lifetime basis, after a significant increase in credit risk. At 31 December N, the condition of a significant increase is no longer met. How should the loss allowance be measured at 31 December N?L3
• At 31 December N-1, the loss allowance of a loan of Ion SA was {lifetime_allowance} (lifetime losses). At 31 December N, the condition of a significant increase in credit risk is no longer met, and the 12-month expected losses amount to {twelve_month_allowance}. Record the entry adjusting the loss allowance.L3
• Tilia SA holds a loan measured at amortised cost that became credit-impaired after origination (it was not credit-impaired at origination). Which statements are correct? Several answers are possible.L3