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IFRS 9 — Curing of a credit-impaired financial asset

Date recorded:

Curing of a credit-impaired financial asset (Agenda Paper 13)

Background

In November 2018, the Committee discussed how an entity presents unrecognised interest in the statement of profit or loss 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"). The question is whether, when applying IFRS 9, the unrecognised interest is presented as interest revenue or 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.

The Committee has published an agenda decision analysing the matter by applying IFRS 9:5.5.8. The adjustment required to bring the loss allowance at the reporting date to the amount that is required to be recognised in accordance with IFRS 9 includes the effect of unwinding of discount. Accordingly, the reversal of the unwinding of discount is presented as a reversal of credit impairment when the asset is cured.

Comment letters were received and some respondents disagreed with the technical analysis and conclusions and said such accounting response might not faithfully reflect the economic substance of that amount. Some respondents suggested narrow scope amendments to IFRS 9.

Staff analysis

Some respondents questioned why the GCA of a credit-impaired asset must reflect the contractual interest accrued instead of the interest revenue determined by applying IFRS 9:5.4.1(b). The staff analysed the definition of GCA in IFRS 9 and continue to hold the view that IFRS 9 requires the GCA to be increased with the unwinding of the discount, i.e. by applying the original effective interest rate to the GCA.

Some respondents considered that the unwinding of the discounted asset is not an impairment gain or loss because it is created by a change in the way the entity calculates interest revenue rather than by a change in expected cash shortfalls. However, the staff consider it is clear that ECL measurement takes into account the time value of money. There is no requirement in IFRS 9 to 'reinstate' interest to reflect the position as if the financial asset had never been credit-impaired.

The staff also disagreed with the recommendation to issue a narrow scope amendment to IFRS 9 because the Board has already considered how best to reflect the substance of credit-impaired financial assets in developing the impairment approach in IFRS 9.

Staff recommendation

The staff recommend finalising the tentative agenda decision with no changes.

Discussion

All Committee members found the staff analysis solid and were supportive of the Agenda Decision. During the discussion, one Committee member reiterated that the recognition of the one-off gain on unwinding would distort the net interest margin which is a key performance indicator to most of the financial institutions. IFRS 9 is very clear that interest income recognised on credit-impaired assets is based on the net carrying amount. This helps in clarifying that the reversal of interest revenue is prohibited.

Based on the responses in the comment letters, many Committee members were concerned about the fact that constituents struggle with the staff analysis and the conclusion. The Chair observed the same. Accordingly, the Chair suggested to provide education material, which sets out the logic and journal entries to enhance people's understanding on the matter.

The Committee decided, by a majority of votes, to publish the Agenda Decision with no changes.

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