DipIFR Syllabus B. Elements of financial statements - Impairment of Financial Instruments- Illustrations - Notes ^{10 / 12}

A company has a 5yr 6% receivable loan of $1,000,000

They expect credit losses of $10,000 pa.

The present value (discounted at 6%) of these lifetime expected credit losses is $42,124.

The present value of the 12-month expected credit losses is $9,434

On day 1
Dr Loan receivable $1,000,000
Cr Cash $1,000,000
End of yr 1 - no significant increase in credit risk - show 12m ECL
Dr I/S Impairment loss $9,434
Cr Loss allowance in financial position $9,434
End of yr 1 - significant increase in credit risk - show re-estimate of lifetime ECL
Let’s say the present value of the lifetime expected credit losses is $34,651.
Dr I/S Impairment loss $25,217 (34,651 – 9,434)
Cr Loss allowance in financial position $25,217

A company has a receivable loan of $1,000,000.

They estimates that the loan has a 1% probability of a default occurring in the next 12 months.

It further estimates that 25% of the gross carrying amount will be lost if the loan defaults.

How much should the 12m ECL be?

= 1% x 25% x $1,000,000 = $2,500

An entity has a 10 yr 6% loan receivable of $1,000,000.

On initial recognition the probability of default is 1%. Expected lifetime losses $250,000

End of year 1 - probability of default increases to 1.5%

End of year 2 - probability of default increases to 30% (but still no evidence of impairment) - expected lifetime losses now $100,000

End of year 3 - probability of default increases further - expected lifetime losses now 150,000 (but still no evidence of impairment)

End of year 4 - probability of default increases further - expected lifetime losses now 200,000 (but still no evidence of impairment)

The loan eventually defaults at the end of Year 5 and the actual loss amounts to $250,000.

At the beginning of Year 6, the loan is sold to a third party for $740,000

How would this be dealt with under IFRS 9?

Initial recognition
Dr Loan receivable – amortised cost asset $1,000,000
Cr Cash $1,000,000
Dr I/S Impairment loss (1% x 250,000) $2,500
Cr Loss allowance in financial position $2,500
At the end of Year 1
Dr Impairment loss in profit or loss (3,750 – 2,500) $1,250
Cr Loss allowance in financial position $1,250
The new 12m ECL would be 1.5% x 250,000 = $3,750.
Interest income 6% x 1,000,000 = $60,000.
At the end of Year 2
Dr I/S Impairment loss (100,000 - 3,750) $96,250
Cr Loss allowance in financial position $96,250
Interest income 6% x 1,000,000 = $60,000
Notice that interest is still calculated on gross amount
At the end of year 3
Dr I/S Impairment loss (150,000 - 100,000) $50,000
Cr Loss allowance in financial position $50,000
Interest income 6% x 1,000,000 = $60,000
At the end of year 4
Dr I/S Impairment loss (200,000 - 150,000) $50,000
Cr Loss allowance in financial position $50,000
Interest income 6% x 1,000,000 = $60,000
At the end of year 5
Dr I/S Impairment loss (250,000 - 200,000) $50,000
Cr Loss allowance in financial position $50,000
Interest income 6% x 1,000,000 = $60,000
From Year 6 onward, interest income would be calculated at 6% on the net carrying amount of the loan $750,000.
Start of year 6
Dr Cash $740,000
Dr Loss allowance in financial position – de-recognised $250,000
Dr Loss on disposal in profit or loss $10,000
Cr Gross loan receivable – de-recognised $1,000,000