IFRS 9 Financial Instruments—Presentation of contractual interest (Agenda Paper 7)

Background

The Committee received a request about how an entity presents unrecognised interest when a credit-impaired (stage 3) financial asset is subsequently paid in full or is no longer credit-impaired (both cases referred to as "cured") applying IFRS 9 Financial Instruments. Specifically, the request asked whether, in the statement of profit or loss, an entity can present previously unrecognised interest as interest revenue or, instead, is required to present it as a reversal of impairment losses. Unrecognised interest is the difference between the interest calculated on the gross carrying amount (GCA) of the financial asset and the net interest recognised based on the net carrying amount of the financial asset during the period that the asset is credit-impaired.

Staff analysis

The staff analysed the question by first considering the accounting during the period in which the asset is credit-impaired which forms the basis on where to present the reversal of unrecognised interest (that represent unwinding of discount on the ECL).  ECL for stage 3 instruments is a discounted amount and therefore the unwinding of discount on the ECL also increases the ECL which is recognised in profit or loss. Accordingly, the reversal of the unwinding of discount is presented as a reversal of credit impairment when the asset is cured.

Staff recommendation

The staff did not recommend to add this matter to its standard-setting agenda because it is considered that the requirements in IFRS 9 provide an adequate basis for such accounting treatment. Instead, the staff recommended that the Committee publish an agenda decision that outlines the relevant requirements set out in IFRS 9.

Discussion

Most of the Committee members were supportive of the staff analysis and conclusion. Most of them agreed that the curing of the asset is a credit recovery event and there is no unrecognised interest under this scenario and therefore View 2 (accounting policy choice that permits presentation as interest income) is not acceptable.

All Committee members supported not to add this matter to the Committee's standard-setting agenda but to publish an Agenda Decision. However, the Chair suggested that even if there is no standard setting, it is worth setting out some education materials (including examples and journal entries) in order to help people understand the mechanics. The Chair suggested redrafting the Agenda Decision to remove the terms "unrecognized interest" and focus on the reversal of impairment. The Committee decided, by a majority of votes, to adopt the wording in the Agenda Decision subject to the above changes.