AdvancedExpert
Purchased or originated credit-impaired assets
Learning objectives
- Calculate the credit-adjusted effective interest rate and the loss allowance of a purchased or originated credit-impaired asset (cumulative changes in lifetime expected credit losses).L4
- Record the journal entries for purchased or originated credit-impaired assets and measure their effect on the financial position, profit or loss and other comprehensive income.L4
Normative references
- IFRS 9 §5.4.1Interest revenue: effective interest method applied to the gross carrying amount, except (a) for purchased or originated credit-impaired financial assets, to which the credit-adjusted effective interest rate is applied to the amortised cost from initial recognition, and (b) for assets that subsequently became credit-impaired, to which the effective interest rate is applied to the amortised cost (net of the loss allowance) in subsequent reporting periods. The return to the gross basis is governed by para. 5.4.2.
- IFRS 9 §B5.4.7An asset may be credit-impaired on initial recognition because its credit risk is very high (and, for a purchase, it was acquired at a deep discount); the initial expected credit losses are then included in the estimated cash flows used for the credit-adjusted effective interest rate. A high credit risk at initial recognition does not, on its own, justify applying that adjusted rate.
- IFRS 9 §5.5.13Notwithstanding paras. 5.5.3 and 5.5.5, for a purchased or originated credit-impaired financial asset, only the cumulative changes in lifetime expected credit losses since initial recognition are recognised as a loss allowance; para. 5.5.14 requires favourable changes to be recognised in profit or loss as an impairment gain, even if they exceed the losses included in the estimated cash flows on initial recognition.
Original summaries of the paragraphs (reference register), never a quotation of the standard.