loan is not credit-impaired at the reporting date but that credit risk has still significantly increased compared
to the credit risk at initial recognition. It continues to measure the loss allowance at an amount equal to lifetime
ECLs, which are €110 at the reporting date.
At each subsequent reporting date, Bank A continues to evaluate whether there has been a significant increase
in credit risk by comparing the loan’s credit risk at initial recognition (based on the original, unmodified cash
flows) with the credit risk at the reporting date (based on the modified cash flows).
Two reporting periods after the loan modification (Year 5), the borrower has outperformed its business plan
significantly compared to the expectations at the modification date. In addition, the outlook for the business
is more positive than previously envisaged. An assessment of all reasonable and supportable information that
is available without undue cost or effort indicates that the overall credit risk on the loan has decreased and
that the risk of a default occurring over the expected life of the loan has decreased, so Bank A adjusts the
borrower’s internal credit rating at the end of the reporting period.
Given the positive overall development, Bank A re-assesses the situation and concludes that the credit risk of
the loan has decreased and there is no longer a significant increase in credit risk since initial recognition. As
a result, Bank A once again measures the loss allowance at an amount equal to 12-month ECLs.
Year Beginning Impairment Modification Interest
Cash
Ending
Loss
Ending
gross
(loss)/gain
(loss)/gain
revenue
flows
gross
allowance amortised
carrying
carrying
cost
amount
amount
amount
A
B
C
D
Gross:
E
F = A + C
G
H = F – G
A × 5%
+ D – E
1
€1,000
(€20)
€50
€50
€1,000
€20 €980
2
€1,000
(€130)
€50
€50
€1,000
€150 €850
3
€1,000
€40
(€136)
€50
€50
€864
€110 €754
4 €864
€24
€43
€907
€86 €821
5 €907
€72
€45
€952
€14 €938
6 €952
€14
€48
€1,000
€0
€0 €0
At its meeting on 22 April 2015, the ITG (see 1.5 above) discussed the measurement of
ECLs in respect of a modified financial asset where the modification does not result in
derecognition, but the cash flows have been renegotiated to be consistent with those
previously expected to be paid.34
The ITG noted that IFRS 9 is clear that an entity is required to calculate a new gross
carrying amount and the gain or loss on modification taken to profit or loss should be
based on the renegotiated or modified contractual cash flows and excludes ECLs unless
it is a purchased or originated credit-impaired financial asset. [IFRS 9.5.4.3, Appendix A].
Financial instruments: Impairment 3831
Consequently, an entity must calculate the gain or loss on modification as a first step
before going on to consider the revised ECL allowance required on the modified
financial asset. Thereafter, the entity is required to continue to apply the impairment
requirements to the modified financial asset in the same way as it would for other
unmodified financial instruments, taking into account the revised contractual terms.
[IFRS 9.5.5.12]. The revised ECL cannot be assumed to be nil as, in accordance with
paragraph 5.5.18 of IFRS 9, an entity is required to consider the possibility that a credit
loss occurs, even if the likelihood of that credit loss occurring is very low. [IFRS 9.5.5.18].
The ITG also discussed the appropriate presentation and disclosure requirements
pertaining to modifications. These are discussed further in Chapter 50 at 7.1.1.
We note that if an entity has no reasonable expectations of recovering a portion of the
financial asset, which is subsequently forgiven, then this amount should arguably be written
off, as a partial derecognition. The gross carrying amount would be reduced directly before
a modification gain or loss is calculated. [IFRS 9.5.4.4, B5.4.9]. This would mean that the loss will
be recorded as an impairment loss, rather than as a loss on modification, and presented
differently in the profit or loss account. In practice, it will often be difficult to disentangle
the effects of modification and write off, as some forgone cash flows may be compensated
for by a higher interest rate applied to the remaining contractual amounts due.
9
FINANCIAL ASSETS MEASURED AT FAIR VALUE
THROUGH OTHER COMPREHENSIVE INCOME
For financial assets measured at fair value through other comprehensive income (see
Chapter 44 at 5.3), the ECLs do not reduce the carrying amount of the financial assets
in the statement of financial position, which remains at fair value. Instead, an amount
equal to the allowance that would arise if the asset was measured at amortised cost is
recognised in other comprehensive income as the ‘accumulated impairment amount’.
[IFRS 9.4.1.2A, 5.5.2, Appendix A].
9.1
Accounting treatment for debt instruments measured at fair
value through other comprehensive income
The accounting treatment and journal entries for debt instruments measured at fair
value through other comprehensive income are illustrated in the following example,
based on Illustrative Example 13 in the Implementation Guidance for the standard.
[IFRS 9 IG Example 13, IE78-IE81].
Example 47.19: Debt instrument measured at fair value through other
comprehensive income
An entity purchases a debt instrument with a fair value of £1,000 on 15 December 2019 and measures the
debt instrument at fair value through other comprehensive income (FVOCI). The instrument has an interest
rate of 5 per cent over the contractual term of 10 years, and has a 5 per cent EIR. At initial recognition the
entity determines that the asset is not purchased or originated credit-impaired.
Debit
Credit
Financial asset – FVOCI £1,000
Cash
£1,000
(To recognise the debt instrument measured at its fair value)
3832 Chapter 47
On 31 December 2019 (the reporting date), the fair value of the debt instrument has decreased to £950 as a result
of changes in market interest rates. The entity determines that there has not been a significant increase in credit
risk since initial recognition and that ECLs should be measured at an amount equal to 12-month ECLs, which
amounts to £30. For simplicity, journal entries for the receipt of
interest revenue are not provided.
Debit
Credit
Impairment loss (profit or loss)
£30
Other comprehensive income(a) £20
Financial asset – FVOCI £50
(To recognise 12-month ECLs and other fair value changes on the debt instrument)
(a) The cumulative loss in other comprehensive income at the reporting date was £20. That amount consists of the total fair value change of £50 (i.e. £1,000 – £950) offset by the change in the accumulated impairment amount representing 12-month ECLs that was recognised (£30).
Disclosure would be provided about the accumulated impairment amount of £30.
On 1 January 2020, the entity decides to sell the debt instrument for £950, which is its fair value at that date.
Debit
Credit
Cash £950
Financial asset – FVOCI £950
Loss (profit or loss)
£20
Other comprehensive income
£20
(To derecognise the fair value through other comprehensive income asset and recycle amounts
accumulated in other comprehensive income to profit or loss, i.e. £20).
This means that in contrast to financial assets measured at amortised cost, there is no
separate allowance but, instead, impairment gains or losses are accounted for as an
adjustment of the revaluation reserve accumulated in other comprehensive income,
with a corresponding charge to profit or loss (which is then reflected in retained
earnings). The tax implications of debt instruments measured at FVOCI is discussed
further in Chapter 29 at 10.4.1 and 10.4.2.
As explained in 7.3.1 above IFRS 9 requires a derecognition gain or loss to be measured
relative to the carrying amount at the date of derecognition. This necessitates an assessment
and measurement of ECLs for that particular asset as at the date of derecognition.
9.2
Interaction between foreign currency translation, fair value
hedge accounting and impairment
The above example is relatively straightforward. A more complicated one, based on a
foreign currency denominated financial asset which is also the subject of an interest rate
hedge, is provided below. It is based on Illustrative Example 14 in the Implementation
Guidance for the standard but has been adjusted so as to include the effect of
discounting in the measurement of ECLs (see 5.7 above). [IFRS 9.IE82-IE102]. Note that we
do not address the additional complexities that will arise from the consideration of
taxation, including deferred tax. The tax accounting implications of debt instruments
measured at FVOCI is discussed further in Chapter 29 at 10.4.1 and 10.4.2.
Financial instruments: Impairment 3833
Example 47.20: Interaction between the fair value through other comprehensive
income measurement category and foreign currency
denomination, fair value hedge accounting and impairment
The example assumes the following fact pattern and that, on initial recognition, ECLs are included when
measuring foreign exchange gains and losses (see 7.3.1 above):
• An entity purchases a bond denominated in a foreign currency (FC) for its fair value of FC100,000 on
1 January 2019.
• The bond is held within a business model whose objective is achieved by both collecting contractual
cash flows and selling financial assets and has contractual cash flows which are solely payments of
principal and interest on the principal amount outstanding. Therefore, the entity classifies the bond as
measured at fair value through other comprehensive income.
• The bond has five years remaining to maturity and a fixed coupon of 5 per cent over its contractual life
on the contractual par amount of FC100,000.
• The entity hedges the bond for its interest rate related fair value risk. The fair value of the corresponding
interest rate swap at the date of initial recognition is nil.
• On initial recognition, the bond has a 5 per cent EIR which results in a gross carrying amount that equals
the fair value at initial recognition.
• The entity’s functional currency is its local currency (LC).
• As at 1 January 2019, the exchange rate is FC1 to LC1.
• At initial recognition, the entity determines that the bond is not purchased credit-impaired. The entity
applies a 12-month PD for its impairment calculation and assumes that payment default occurs at the
end of the reporting period (i.e. after 12 months). In particular, the entity estimates the PD over the next
12 months at 2 per cent and the LGD at FC60,000, resulting in an (undiscounted) expected cash shortfall
of FC1,200. The discounted expected cash shortfall is FC1,143 at 5 per cent EIR (see the example below
for the detailed calculation).
• For simplicity, amounts for interest revenue are not provided. It is assumed that interest accrued is
received in the period. Differences of 1 in the calculations and reconciliations are due to rounding.
The entity hedges its risk exposures using the following risk management strategy:
(a) for fixed interest rate risk (in FC) the entity decides to link its interest receipts in FC to current variable
interest rates in FC. Consequently, the entity uses interest rate swaps denominated in FC under which it
pays fixed interest and receives variable interest in FC; and
(b) for foreign exchange (FX) risk, the entity decides not to hedge against any variability in LC arising from
changes in foreign exchange rates.
The entity designates the following hedging relationship: a fair value hedge of the bond in FC as the
hedged item with changes in benchmark interest rate risk in FC as the hedged risk. The entity enters
into a swap that pays fixed and receives variable interest in FC on the same day and designates the swap
as the hedging instrument. The tenor of the swap matches that of the hedged item (i.e. five years). This
example assumes that all qualifying criteria for hedge accounting are met (see paragraph 6.4.1 of
IFRS 9). The description of the designation is solely for the purpose of understanding this example (i.e.
it is not an example of the complete formal documentation required in accordance with paragraph 6.4.1
of IFRS 9).
This example assumes that no hedge ineffectiveness arises in the hedging relationship. This assumption is made
in order to better focus on illustrating the accounting mechanics in a situation that entails measurement at fair
value through other comprehensive income of a foreign currency financial instrument that is designated in a fair
value hedge relationship, and also to focus on the recognition of impairment gains or losses on such an instrument.
The entity decided not to amortise the fair value hedge adjustment to profit or loss before the hedge ceases or
the asset is credit-impaired. Consequently, in this example, there is no adjustment to the EIR due to fair value
hedge accounting. However, such an adjustment to the EIR would at the latest be required when the entity ceases
to apply hedge accounting or when the asset becomes credit-impaired, i.e. moved to stage 3. (See 7.5 above).
3834 Chapter 47
Situation as per 1 January 2019
The table below illustrates the amounts recognised in the financial statements as per 1 January 2019, as well
as the shadow amortised cost calculation for the bond, based on the fact pattern described above (debits are
shown as positive numbers and credits as neg
ative numbers):
Financial Statements
Shadow Calculation
FC
LC
FC
LC
Statement
of
financial position
Bond (FV)
100,000
100,000
Gross carrying amount
100,000 100,000
Swap (FV)
–
–
Loss allowance
(1,143)
(1,143)
Amortised
cost
98,857 98,857
Statement
of
profit or loss
Impairment
1,143
1,143
FV hedge adjustment
–
–
FV hedge (bond)
–
–
Adjusted gross carrying amt.
100,000
100,000
FX gain/loss (bond)
–
–
Adjusted amortised cost
98,857 98,857
FV hedge (swap)
–
–
FX gain/loss (swap)
–
–
Statement of OCI
FV changes
–
–
Impairment offset (1,143)
(1,143)
FV hedge adjustment – –
As per 1 January 2019, the entity recognises the bond and the swap at their initial fair values of LC100,000
and nil, respectively. The loss allowance of FC1,143 is recognised in profit or loss. The amount is calculated
as the difference between all contractual cash flows that are due to the entity in accordance with the contract
and all the cash flows that the entity expects to receive (i.e. all cash shortfalls), discounted at the original
effective interest of 5 per cent, and weighted by the probability of the scenario occurring. To keep the example
simple, it is assumed that default on the bond occurs one year after the date of the initial recognition, at which
point the recoverable amount of the bond is received. This means that in the case of a default the entity expects
cash flows of FC45,000 (which is the principal of FC100,000 plus one year of interest of FC5,000 less the
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 758
