Impairment of Financial Assets (IFRS 9) Flashcards
Where must IFRS 9 applye?
For financial assets that are debt instruments
How is impairment IFRS 9 measured?
Either at amortised cost or at FV through OCI.
e.g. Loan receivables, trade receivables and investments in debt such as debentures/bonds
Accounting for Trade receivables with the simplified approach in IFRS 9
On recognition of the TR, no credit loss allowance (i.e. no bad and doubtful debt allowance) is required.
Instead, past default information is used to adjust.
What is the credit loss approach?
and when does it apply?
A loss allowance for expected credit losses must be applied.
e.g. financial entities such as banks in relation to the loans they have made to customers (loan receivable).
It applies when the simplified approach cannot be applied.
What are the 2 types of loss allowance?
Lifetime expected credit losses
12 month expected credit losses
How does the lifetime expected credit loss work?
The lender holding the financial asset compares the present value of cashflows they are contractually entitled to receive from the borrower for the possibility of the borrower defaulting in some way on the loan.
(called cash shortfall and lenders will normally use their past experience to determine the likely default rate)
12 month expected credit losses, how does it work?
This is calculated by taking the lifetime expected credit loss and weighting it by the % probability that loss will occur in the next 12 months
(May be nil)
Financial assets held at FV through OCI, how to account?
Impaired using the same model, howveer, a loss allowance is not created for credit loss.
Instead falls in FV due to credit losses are recognised in P/L with the remainder recognised in OCI.
Financial assets held at P/L , how to account?
these at impaired automatically through P/L as they are revalued at each reporting date
with losses taken to the IS as part of the standard IFRS 9 measurement model
Why is IFRS 9 considered prudent and forward looking?
COnsidered prudent and forward looking as it requires entities to account for expected credit losses on financial deb assets.
Why is IFRS 9 praised to provide more relevant information to users?
Because the likelihood of collection of financial asset cash flows is incorporated into the financial asset’s measurement and provides users with better information about the (un)certainty of future cash flows and recoverability of financial assets.
Why do some people criticise IFRS 9 as complex and onerous?
Because it significantly impacts entities with large debt instrument financial asset balances such as banks and financial institutions.
however the response to IFRS 9 being complex and onerous is…
that arguably the expected credit loss approach incorporates elements of the entity business model into accounting for impairment on such assets.
IFRS 9 is argued to be uncertain at times because it requires the managers judgement…
This causes subjectivity within the financial statement which hinders the reliability of the disclosure.
