CH12 - Accounting Implications of Credit Risk Flashcards
1
Q
Loan Impairment
A
- A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.
- Impairment can be recognised for both specific loans, and for portfolios of loans, where the actual problem loans are unknown.
2
Q
What does impairment of debt securities mean?
A
- Debt securities (bonds) can be classified as held to maturity, available for sale or as trading securities, and this classification drives the accounting treatment
- Valuation can be temporary or credit-related
- Temporary changes are recognised on the income statement as other comprehensive income, and as acc other comprehensive income on the balance sheet
- Changes in credit value is also recognised in income, but known as other-than-temporary impairment (OTTI)
3
Q
Accounting for netting
A
- Act by which two counterparties owe each other money, and under a legally enforceable agreement, they are allowed to net the two sums, resulting in just one counterparty paying the other.
- Terms generally stipulate that netting is only allowed if one party does into bankruptcy or defaults
4
Q
Hedge accounting
A
Hedges (derivatives) are use to mitigate credit risk exposure. Three types:
- Accounting for Fair-Value Hedge: where the company uses a derivative transactions to offset an exposure to changes in the FV of an asset or liability. E.g. hedged bond to be recorded as income instead of OCI
- Accounting for Cash-Flow Hedge: changes in value don’t flow through income but rather to OCI
- Accounting for Macro Hedges: hedge accounting doesn’t apply
5
Q
What does IFRS 7 deal with?
A
-Requires disclosures on a reporting entity’s financial instruments and how they affect the entity’s financial position, performance and cash flows. It also requires disclosures on the risks associated with financial instruments and the processes for how an entity manages those risks
