Impairment of Financial Assets - Ind AS - Indian Accounting Standards - Companies Law

Impairment of Financial Assets [Chapter 5.5, IndAS 109] An entity shall recognise a loss allowance for expected credit losses on a financial asset that is measured in accordance with Amortised Cost Method or Fair Value through Other Comprehensive Income, a lease receivable, a contract asset or a loan commitment and a financial guarantee contract to which the impairment requirements apply. This Impairment model is applicable to Investments in debt instruments measured at amortised cost or FVTOCI; All loan commitments Not measured at FVTPL; Financial Guarantee Contract which are not accounted for at FVTPL; and Finance Lease receivables (Net Investment in lease) that are within the cope of Ind AS 116; Trade Receivable or contract assets within the scope of Ind AS 115. If the asset is measured at FVTPL Fair Value of the asset is determined after considering all the risks and returns from the asset and it is accounted for in P L automatically and doesn t require any additional impairment testing. Impairment recognition not required if: - It is a financial liability/ Equity instrument. Financial assets measured at FVTPL. Financial asset (Investment in Equity instrument whether at FVTPL/FVTOCI) Irrevocable Financial asset that are DEBT INSTRUMENT measured at FVTPL. What is Expected Credit Loss? Expected credit loss is difference present value of contractual cash flows and present value of cash flows that entity expects to receive discounted using original EIR. The objective of the impairment requirements is to recognise lifetime expected credit losses for all financial instruments for which there have been significant increases in credit risk since initial recognition - whether assessed on an individual or collective basis - considering all reasonable and supportable information, including that which is forward-looking. Measurement of expected credit losses An entity shall measure expected credit losses of a financial instrument in a way that reflects: an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes; the time value of money; and reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. Different approaches for impairment of financial asset: General Approach: Recognise, at each reporting date, an impairment loss allowance using either 12 Month ECL or Lifetime ECL The use of ECL depends on whether there has been a significant increase in credit risk on the instrument since its initial recognition. Simplified Approach: Recognise at each Reporting date, Impairment Loss allowance based on LIFETIME ECL. This approach is mandatory for: Trade receivables Any contractual right to receive cash/another Financial Asset that results from transaction within IND AS 115. Purchased/ originated credit impaired financial asset approach: Applicable to financial asset which are credit impaired on Initial recognition (Lifetime ECL + Interest on Net carrying amount). Determining whether Credit Risk has increased significantly: Existing/ forecast adverse changes in business, financial or economic conditions expected to cause a significant change in the borrower's ability to meet its debt obligations. Actual or expected significant change in the operating results of the borrower (e.g.: expected declining revenues/margins, increasing operating risks, working capital deficiencies, management problems etc.) Significant increases in credit risk on other financial instruments of the same borrower. Actual or expected significant adverse change in the regulatory, economic, or technological environment of the borrower. Significant changes in the value of the collateral OR quality of third-party guarantees or credit enhancements. Reductions in financial support from a parent entity. Significant changes in the expected performance and behaviour of the borrower. Calculation of Impairment Amount (Loss allowance/Expected Credit Loss):- Method for calculation of Impairment loss for Single Financial Asset [Probability of Default Approach]- Gross carrying amount of Financial Asset*Loss given default (LGD)*Probability of default (POD) Method for calculation of Impairment loss for portfolio of Financial Asset [Provisional Matrix Approach] Category of financial asset on the basis of their Risk Gross Carrying Amount of Financial Asset Expected Credit Loss Current XXX XXX 1-30 days past due XXX XXX 31-60 days past due XXX XXX More than 60 days XXX XXX Total XXX Note:- Default Rate/Loss Rate = PV of expected loss (On the basis of observed historical sample data)/Gross carrying amount of financial asset*100 What are the 12months ECL? 12 Months ECL represents the lifetime cash shortfall that will affect, if a default occur within 12 months after reporting date, weighted by probability of default occurring. What is Life time ECL? For lifetime expected credit losses, an entity shall estimate the risk of a default occurring on the financial instruments during its expected life.