Modification of the cash flows of a financial asset

Learning objectives

• Calculate the modification gain or loss on a financial asset modified without derecognition and distinguish the case in which the modification results in derecognition.L3, L4
• Record the journal entries for the modification of the contractual cash flows of an asset and measure their effect on the financial position, profit or loss and other comprehensive income.L3, L4
• Support in writing, from the facts of the case, the judgement made on the modification of the contractual cash flows of an asset.L3, 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.

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

1 question

• Pavé SA holds a loan whose gross carrying amount is {previous_gross}. The contractual cash flows are renegotiated without the loan being derecognised. The gross carrying amount recalculated to reflect the modified cash flows is {recalculated_gross} (case datum). Calculate the modification loss to be recognised in profit or loss (give it as a positive amount).L3