Modified assets and credit risk assessment

Learning objectives

• Assess the credit risk of an asset modified without derecognition by comparing the current risk of default (modified terms) with the risk at initial recognition (original terms).L4

Normative references

• IFRS 9 §5.4.3When the contractual cash flows of a financial asset are renegotiated or otherwise modified without resulting in derecognition, the entity recalculates the gross carrying amount (present value of the modified cash flows discounted at the original effective interest rate, or at the credit-adjusted rate for a purchased or originated credit-impaired asset) and recognises a modification gain or loss in profit or loss; any costs or fees adjust the carrying amount and are amortised over the remaining term. If the modification results in derecognition, the modified asset is treated as a new financial asset.
• IFRS 9 §5.5.12For a financial asset modified without derecognition, the entity compares the risk of a default occurring at the reporting date (based on the modified terms) with the risk of a default at initial recognition (based on the original terms) to assess whether credit risk has increased significantly.

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

1 question

• Sol SA granted a loan whose contractual cash flows are renegotiated during its life, without the loan being derecognised. At the reporting date, Sol assesses whether credit risk has increased significantly since initial recognition. Which comparison does it use?L4