Accounting for short-term loans IFRS. For credit exposures carried at fair value

IFRS 9 is considered to have simplified the classification financial instruments compared to the previous standard, IAS 39. Under the new standard, financial assets are measured depending on how an entity manages its financial instruments (“business model”) and what cash flows it receives from them. For financial assets, IFRS 9 introduces three classification categories:

There are two classification categories for financial liabilities in IFRS 9: at amortized cost or at fair value through profit/loss.

Classification of financial assets

Initially (in the first part of the standard, published in 2009), IFRS 9 divided into two groups: 1) financial assets carried at amortized cost and 2) financial assets carried at fair value. At the same time, changes in the fair value of financial assets from the second qualification category were allowed, under certain conditions, at the choice of the company, to be reflected in other comprehensive income.

The final version of IFRS 9 introduced a third classification category, which was introduced at the request of some stakeholders, mainly, as I understand it, insurance companies (as written in paragraph IN8 of IFRS 9). This third category is called “financial assets at fair value through other comprehensive income” or FA through OCI. As a result, two categories of financial assets similar in name were obtained, differing both in essence and in the rules of reporting.

Accepted abbreviations:

OCI - other comprehensive income (equity item)
P&L - Profit and Loss Statement
CC - fair value

Basis for classification of financial assets

The classification of financial assets in IFRS 9 is based on how an entity manages groups of financial assets and what are the characteristics cash flows that will be received from these assets. Thus, the IASB decided to bring accounting and the accounting used by the management of companies in relation to assets closer together. This approach aims to enable users of financial statements to predict future cash flows to be received. The classification and valuation of financial assets under IFRS 9 is tied to the economic behavior of the investor company, or, in the words of the standard, to the “business model for managing” these assets.

The business model to be used should not be determined in relation to an individual instrument, but at the level of groups of financial instruments. A company may use more than one business model to manage its financial assets.

1. Financial assets at amortized cost

The financial asset must be valued at amortized cost if both of the following conditions are met:

(a) the financial asset is held within a business model whose objective is to collect contractual cash flows, and
(b) cash flows are solely payments of principal and interest on the principal amount outstanding.

which discounts estimated future cash receipts over the expected life of the financial asset. That is, amortized cost reflects the cash flows from a financial asset that an entity will receive if it holds the asset to maturity.

While the objective of an entity's business model may be to hold financial assets in order to collect contractual cash flows, it is not necessary for the entity to hold all of these instruments to maturity. Even if sales of financial assets are taking place or such sales are expected in the future, the business model may be classified in this category.

For example, credit risk management aimed at minimizing potential credit losses resulting from deterioration in the credit quality of assets is integral part such a business model. The sale of a financial asset because it no longer meets the credit criteria set out in the documented investment policy company, is an example of sales caused by an increase in credit risk.

However, frequent buying and selling of financial assets or buying/selling in large volumes is not consistent with this financial asset management business model.

Example 1: Recording a financial asset at amortized cost

On April 1, 2015, Omega issued 100,000 bonds with a face value of $100 per bond. Delta has bought the entire Omega bond issue and intends to hold these instruments to maturity. Delta incurred an additional cost of $100,000 to record this transaction. The bonds were issued at a price of $130 each and are redeemable at face value March 31, 2019. Interest of $12 per bond is paid annually at the end of the period on March 31st. Effective annual interest rate ( internal norm yield) on these bonds is 5%.

Delta's management believes that as at 31 March 2016 there was no significant increase in credit risk. The 12-month ECL estimate as of March 31, 2016 is $400,000.

Exercise.

Solution:

2) Since the business model for managing financial assets is to receive cash flows in the form of interest and principal, such financial assets should be carried at amortized cost.

4) The costs associated with registering this transaction increase the value of the financial asset: 13,000,000+100,000 = 13,100,000.

Amortized cost is calculated excluding valuation allowance (in thousands of dollars):

5) At each reporting date, Delta must assess whether there has been a significant increase in credit risk. (According to the expected credit loss model used)

6) In this case, this is not the case, so valuation reserve recognized in 12-month expected credit losses.

Dr Loss of income statement Cr Allowance – 400,000

OFP as of 31.03.16

Financial asset (long-term) - 12,155 (12,555 - 400)

Financial income - 655
Impairment loss - (400)

2. Financial assets at fair value

If the company expects to receive cash flows from the sale of financial assets (it is going to actively trade them, playing on the difference in market value), then such assets should be valued at financial reporting at fair (market) value with changes in fair value through profit/loss.

This includes, first of all, investments in shares, i.e. into equity instruments of other companies. Shares do not generate interest income and they have no "principal debt". Therefore, as a general rule, if a company buys shares in another company, then the investment management business model is to realize favorable changes in fair value (selling at a higher price). Such financial assets are part of the trading portfolio and are valued at MA through profit/loss.

In the event that investments in shares are not intended for trading in them, but will be held with strategic goal(for example, shares of a key supplier whose equity stake may be increased in the future), the investor company may elect to recognize changes in fair value through other comprehensive income. The cumulative gain or loss in OCI would then be reclassified to another line item in equity (for example, retained earnings). That is, under no circumstances will profits/losses from such a financial asset fall into profit and loss and will not affect the amount of net profit.

Of course, not only equity financial instruments (shares) fall into this category. At fair value through profit/loss, for example, investments in convertible bonds of another company are also recognized. In this case, the cash flows from the instrument are not only interest and principal payments, but also the return that is linked to the value of the equity of the issuer. Therefore, under IFRS 9, investments in convertible bonds are carried at fair value through profit and loss. With (when they are obligations) can be found by clicking on the link.

In addition, this category includes investments in debt instruments(bonds) if, within the framework of the business model, the company manages such assets in order to receive cash flows through their sale. In such a case, the company evaluates the performance of the bond investment portfolio and makes decisions to sell or buy based on their fair value.

This business model involves active buying and selling, in contrast to the holding business model, where sales are infrequent. In this case, the company can receive stipulated by the agreement the cash flows from the bonds over the time it holds the financial assets. But earning interest income in this case is a side transaction, and the main objective of this asset management business model is to realize beneficial changes in fair value.

Example 2. Reflection of a financial asset in FL through income statement

On April 1, 2015, Delta acquired 100,000 shares of Omega. Delta incurred an additional cost of $100,000 to record this transaction.

Delta's management views these financial assets as part of its trading portfolio and intends to receive cash flows from the sale of these assets. The fair value of the shareholding as of March 31, 2016 was $12.8 million.

Exercise. Explain how this operation should be reflected in Delta's financial statements as of March 31, 2016.

Solution:

1) For Delta, this is a financial asset.
2) Since the business model for managing financial assets involves receiving cash flows from the sale of assets, such financial assets should be accounted for in FA through profit and loss.
3) The fair value of the block of shares at the acquisition date is 13,000,000 ($130 x 100,000).
4) The costs associated with the registration of this transaction are written off to income statement - 100,000.
5) Recognition of revaluation at the reporting date Dr Loss of income statement Cr Financial asset – 200,000 (13,000,000 – 12,800,000)

Extracts from the financial statements (in thousands of dollars):

OFP as of 31.03.16

OSD for the year ended 03/31/16

Expenses for the acquisition of FA - (100)
Loss from change in MA of an asset – (200)

3. Financial assets at fair value through OCI

This category was introduced by the IASB following requests from companies that use an intermediate business model for managing financial assets: they seek to increase the return on their investment portfolio both by earning interest cash flows and by selling at a price higher than the purchase price.

This type of business model can fit various goals. For example, the objective of a business model might be to manage day-to-day liquidity needs, maintain a certain level of interest yield, or ensure that the maturities of financial assets match the maturities of liabilities funded by those assets. To achieve this goal, the company needs not only to receive contractual cash flows, but also to sell financial assets from time to time.

Compared to a business model whose objective is to hold financial assets to earn interest and principal, this business model will typically involve more frequent and larger sales. This is due to the fact that the sale of financial assets is an essential condition for achieving the goal of the business model, and not a side transaction.

The overall return of the portfolio under this asset management model depends on both interest income and cash flows from the sale.

Example 3. Reflection of a financial asset in FA through OCI

On April 1, 2015, Omega issued 100,000 bonds with a face value of $100 per bond. Delta bought the entire Omega bond issue. Delta incurred an additional cost of $100,000 to record this transaction. The bonds were issued at a price of $130 each and mature at par on March 31, 2019. Interest of $12 per bond is paid annually at the end of the period on March 31st. The effective annual interest rate on these bonds is 5%.

Delta management intends to receive contractual flows Money and, if necessary, sell bonds to maintain liquidity. As of March 31, 2016, according to Delta's estimates, there was no significant increase in credit risk. The estimated 12-month expected credit loss as of March 31, 2016 was $400,000. The fair value of the bond package as at 31 March 2016 is $12.8 million.

Exercise. Explain how this transaction should be accounted for in Delta's March 31, 2016 financial statements.

Solution:

1) For Delta, this is a financial asset.

2) Since the business model for managing financial assets is to receive cash flows in the form of interest and principal, as well as to receive cash flows from the sale of assets, then such financial assets should be carried at fair value through other comprehensive income.

3) Delta paid Omega for the bonds $130*100,000 pieces = 13,000,000.

4) The costs associated with registering this transaction increase the value of the financial asset: 13,000,000 + 100,000 = 13,100,000.

5) Amortized cost is calculated without taking into account the allowance (in thousands of dollars):

6) At the reporting date, the financial asset must be revalued to fair value: Dr Financial asset Cr OCI – 245,000 (12,800,000 – 12,555,000)

7) At each reporting date, Delta must assess whether there has been a significant increase in credit risk.

8) This is not the case here, so an allowance is recognized at 12-month expected credit losses.

Dr Loss of income statement Cr OCI – 400,000

Extracts from the financial statements (in thousands of dollars):

OFP as of 31.03.16

Financial asset (long-term) – 12,800
Other components of equity (loan OCI) – 645 (245 + 400)

GTC for the year ended 03/31/16

Financial income Kt GTC – 655
Recognition of impairment loss Dt IPL – (400)

PSD for the year ended 03/31/16

Recognition of impairment loss Kt OCI – 400
Reflection of profit from the change in the MA of the asset Kt PSD - 245

Since cash flows in this asset management business model represent both interest and proceeds from the sale, the Committee felt that both amortized cost and fair value information would be useful to users of the financial statements.

Therefore, for this classification category, interest income is presented in profit or loss as if the financial asset were measured at amortized cost, while in the income statement financial position the financial asset is measured at fair value.

When such financial assets are derecognised, the cumulative gains or losses recognized in other comprehensive income are reclassified to profit or loss.

Some generalizations for students of Dipif

For those who are preparing for the exam, the pictures below will be useful, in which we are talking on equity and debt instruments. If we take equity instruments, i.e. shares, then for them there is one category of evaluation - at fair value. However, changes in fair value can be attributed to both the GTC and the OCI (examiner Paul Robins's favorite on the Dipifre exam)

Rice. one

If we consider investments in debt instruments - bonds, then all three categories of valuation of financial assets can be used for them. But be careful: MA through OCI for stocks is not the same as MA through OCI for bond investments. Moreover, the differences are not only in the valuation of such assets, but also in the fact that for bonds, the profits/losses accumulated in OCI upon the disposal of a financial asset fall into the income statement, and for shares, the profits/losses accumulated in OCI are transferred to another line of capital, i.e. e. never affect net income.

Fig.2

Initial assessment

Loans are initially measured at fair value.

For loans issued at market interest rates, the fair value consists of the amount you this loan and the actual costs of these transactions, net of commission income for granting a loan.

The fair value of loans issued at non-market rates (lower or higher) is determined by discounting the expected cash flows at the market interest rate for similar loans.

The difference between the amount of cash provided and the fair value of the loans is recognized as an expense or income.

Follow-up evaluation

Subsequent to initial recognition, all loans are measured at their amortized cost at the revaluation or reporting date.

Amortized cost of credit is the cost of the loan, determined at initial recognition, less principal repayments, plus or minus the accrued amortization of the difference between the original cost and the value at maturity, less the partial write-off of the principal amount.

Impairment and bad debts may be assessed and recognized on an individual basis for loans that are significant in their own right. Impairment and bad debts may also be measured and recognized collectively for a group of similar loans. It should be noted that at the time of issuing a loan or a group of loans, no provision (general reserve) for impairment is created, since one loan issuance cannot lead to impairment. If the bank has incurred losses on similar loans in a certain amount, then these expected losses are taken into account in the expected cash flows.

A loan is considered impaired if its recoverable amount is less than its carrying amount.

Objective evidence of loan impairment includes the following information:

significant financial difficulties of the borrower;

Actual breach of conditions loan agreement, for example, refusal or evasion of payment of interest or principal of a debt;

provision by the bank preferential terms for economic or legal reasons related to the financial difficulties of the borrower, which the bank would not have decided under any other circumstances;

high probability of bankruptcy or financial reorganization of the borrower;

recognition of an impairment loss on this loan in the financial statements for previous period;

Retrospective maturity analysis accounts receivable, showing that it will not be possible to collect the entire nominal amount of receivables.

Recoverable amount is the present (current) value of the expected cash flows from the loan, discounted at the original effective rate of the loan.

If the bank received collateral, guarantee or other collateral for the issued loans, then cash flows from the sale of collateral should be taken into account when calculating the recoverable amount.

Effective interest rate. The effective interest rate is the interest rate required to exactly discount all future cash flows of credit claims over their life to their current carrying amount.

If the interest rate on a loan is variable, then the current effective interest rate set in accordance with the agreement is applied for discounting purposes. Instead of making such fair value calculations, a bank may measure the impairment of a financial asset based on the fair value of the loan using available this moment market price if there is an active market for that loan.

The difference between the recoverable amount and the carrying amount is the amount of the impairment and is expensed by creating an allowance for possible losses.

In cases where, after the recognition of an impairment, the carrying amount recovers (the recoverable amount is greater than the carrying amount), the impairment allowance is reduced from the income of the reporting period.

For bad loans, a reserve is created in the amount of 100% of the loan amount.

Loans are written off when no economic benefits are expected from them.

Estimating the company's liabilities is one of the important and necessary elements in calculating the value of a business. Our recommendations will help you quickly evaluate long-term and short-term borrowings in order to determine the current value of the financing instruments used by the company with maximum accuracy.

According to the article " Borrowed funds» balance sheet(lines 1410, 1510) the credits and loans received by the company are reflected. Borrowings include liabilities for:

received loans from banks;
received loans and loans from non-financial organizations and individuals;
sold debt securities (bonds, etc.);
financial bills issued.

How to evaluate bank loans and borrowings when determining the value of a business

For rate bank loans, as well as loans and loans to do the following:

2. Identify contracts with expired payment. If the company has overdue obligations, it is necessary, in accordance with the terms of the contract, to calculate the amount of penalties and fines for the period from the date on which the payment should have been made to the valuation date. These amounts are added to the carrying amount of such debt.

3. Determine market interest rates for each contract. The market rates are weighted average interest rates on loans granted credit organizations non-financial organizations, taking into account the currency and term of the loan. Uses data that is current as of the date closest to or before the valuation date.

4. Calculate the market value of debt obligations (rights to claim on credits and loans) for an operating enterprise in the context of each obligation that has its own repayment terms. Remember that the debt on accrued interest on a long-term loan, if they are paid monthly, is actually a short-term debt, so it is accounted for on line 1510, and not on line 1410 of the balance sheet.

Formula 1.Calculation of the market value of short-term and long-term loans and borrowings

Decryption	Units	Data source
Market price credits and loans		Calculation result
The amount of liabilities on the balance sheet		Data accounting companies and loan agreements. If, in accordance with their terms, interest and penalties have arisen for the period from the date on which the payment should have been made to the date of assessment, they should be added to the amount of the main liabilities
The actual interest rate on this liability	% per annum	Terms of repayment of received loans and credits, in accordance with the relevant agreements
	% per annum	Data on the level of interest rates on similar obligations (for example, data from a bulletin of banking statistics)
The length of the period until the full repayment of the obligation		Terms of repayment of received loans and credits in accordance with the relevant agreements
The amount of interest accrued as of the valuation date but not paid		Company accounting data

This formula is valid for assessing obligations repaid by a lump sum payment after a period (n). For obligations repaid in several tranches, the cost is calculated by summing the results of the calculation using a similar formula applied to each payment (how to evaluate debt load, cm. ).

How to determine the cost of bond issues when determining the value of a business

For unquoted valuable papers or securities that have not been traded for one or more months prior to the valuation date, price data for similar securities may be used. In this case, the calculation is carried out according to formula 2, but instead of the quotation of the security being valued, the quotation of the analogue is taken.

The following criteria are used to select similar securities:

issuers belonging to the same group - non-national (for example, Eurobonds), national, corporate;
the same rating rating agencies and similar risks (denominated in the same currency, comparable risk of issuers, etc.);
same maturity date.

An alternative calculation method for which there are no quotes is possible using formula 3 (income approach).

Formula 3.Calculation of the market value of unquoted bond loans for one bond

Decryption	Units	Data source
Market value of unquoted bond issues for one bond		Calculation result
Annual coupon income(coupon income) on the bond for the t-th period		Coupon income is determined by the terms of the bond issue
The nominal value of the bond to be redeemed at the end of its circulation period (in nth year)		Prospectus for the issue of securities, report on the results of the issue ( additional issue) valuable papers
Market interest rate for similar bonds	% per annum	RusBonds)
Duration of the period until the full repayment of the bonded loan		Securities issue prospectus, report on the results of the issue (additional issue) of securities

When determining the value of these bonded loans, it is necessary to correctly calculate the coupon yield (one of the important calculated indicators). It depends on the type of paper:

fixed income bonds. For them, the coupon yield is calculated as the product of the nominal value and the fixed interest rate on bonds;
bonds with variable interest income (coupon rate). In this case, interest income can be either “floating” (its amount depends on the level of the refinancing rate) or evenly increasing (the rate can be linked to the inflation rate) and is calculated as the product of the nominal value and the variable interest rate on bonds as of the valuation date;
combined bonds (during certain period income is paid at a fixed rate; after this period - at a floating rate);
with constant coupon income;
with zero coupon.

In addition, it is worth considering perpetual bonds, which provide for an indefinitely long payment of income in a fixed amount.

Formula 4Calculation of the market value of a perpetual bonded loan

Decryption	Units	Data source
Market value of a perpetual bond issue (one bond)		Calculation result
The amount of the annual yield on the bond		Securities issue prospectus, report on the results of the issue (additional issue) of securities
Market interest rate on this liability	% per annum	Level data effective yield to redemption of comparable bonds (for example, on the RusBonds website).

"Accounting and banks", 2005, N 4

Loans and receivables are accounted for in accordance with IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement.

According to the classification of financial assets under IFRS 39, loans are considered to be all loans issued and acquired by the bank and its receivables, except for those held for sale.

Recognition and derecognition of loans

The Bank recognizes loans in its financial statements when it becomes a party to the agreement with respect to the loan. Acquisitions and disposals of loans are recognized and derecognised as of the date of the transaction or settlement date.

The method used is applied consistently to all acquisitions and disposals of loans.

Loans are derecognised when:

loan repaid;
the loan has been written off;
credit transferred.

When making transactions with loans, an assessment is made of whether their transfer has taken place and, if it has taken place, whether subsequent derecognition of transferred loans is allowed. If substantially all the risks and rewards of a loan have been transferred, they are derecognised.

If a bank transfers control of credit claims to another party but receives a new financial asset and/or assumes a new financial liability, then a new financial asset or liability is recognized at fair value, as well as income or expenses from this transaction in the amount of the difference between: a) revenue and b) the amount of the carrying amount of credit claims and the fair value of the new financial liability assumed.

Estimating the cost of credits Initial appraisal

Loans are initially measured at fair value.

The issuance of loans is accounted for by the following entry:

D-t - issued loans,

Kt - cash.

For loans issued at market interest rates, the fair value consists of the amount of the loan issued and the actual costs of making these transactions, less fee income for granting the loan.

Example 1. Initial recognition of loans

The bank issued a loan in the amount of 1,000,000 US dollars. For issuing a loan, the bank takes a commission from the borrower in the amount of 1% of the loan amount. The bank paid a third party appraisal company$5,000 to evaluate the collateral received for this loan.

The amount of the balance sheet value of the loan at the time of its issuance will be 995,000 US dollars (1,000,000 + 5,000 - 1,000,000 x 1%).

D-t - loans issued (fair value) - $ 995,000,

Kt - obligation on provided appraisal services- 5000 dollars,

Kt - cash (amount of funds provided) - $ 990,000

The fair value of loans issued at non-market rates (lower or higher) is determined by discounting the expected cash flows at the market interest rate for similar loans.

The difference between the amount of cash provided and the fair value of loans is recognized as an expense or income.

When loans are issued at below market rates, the following entry is made:

D-t - loss from issuing loans at below market rates,

Kt - cash (amount of funds provided).

When loans are issued at rates higher than the market, the following entry is made:

D-t - issued loans (discounted amount at the market interest rate),

Kt - cash (amount of funds provided),

Kt - profit from issuing loans at rates higher than the market.

Follow-up evaluation

Subsequent to initial recognition, all loans are measured at their amortized cost at the revaluation or reporting date.

Amortized cost

The amortized cost of a loan is the cost of the loan, as determined at initial recognition, less the principal repayments plus or minus the accrued amortization of the difference between the original cost and the maturity value, less the partial write-off of the principal amount.

Impairment and bad debts may be assessed and recognized on a case-by-case basis for loans that are significant in their own right. Impairment and bad debt may also be measured and recognized collectively for a group of similar loans. It should be taken into account that at the time of issuing a loan or a group of loans, an allowance (general reserve) for impairment is not created, since one loan issuance cannot lead to impairment. If the bank has incurred losses on similar loans in a certain amount, then these expected losses are taken into account in the expected cash flows.

A loan is considered impaired if its recoverable amount is less than its carrying amount.

Objective evidence of loan impairment includes the following information:

significant financial difficulties of the borrower;
actual violation of the terms of the loan agreement, such as refusal or evasion of payment of interest or principal;
the provision by the bank of preferential terms for economic or legal reasons related to the financial difficulties of the borrower, which the bank would not have decided under any other circumstances;
high probability of bankruptcy or financial reorganization of the borrower;
recognition of an impairment loss on this loan in the prior period's financial statements;
a deterioration in the credit rating of the borrower's company is not in itself indicative of impairment, although it may be evidence of impairment given other available information;
a retrospective analysis of the maturity of receivables, showing that the entire nominal amount of receivables cannot be collected.

Recoverable amount

The recoverable amount is the present (current) value of the expected cash flows from the loan, discounted at the original effective rate of the loan.

If the bank received collateral, guarantee or other collateral for issued loans, cash flows from the sale of collateral should be taken into account when calculating the recoverable amount.

Effective interest rate

The effective interest rate is the interest rate required to exactly discount all future cash flows of credit claims over their life to their current carrying amount.

If the interest rate on a loan is variable, then the current effective interest rate set in accordance with the agreement is applied for discounting purposes. Instead of making such fair value calculations, a bank may measure impairment of a financial asset based on the fair value of the loan using a current market price if there is an active market for the loan.

The difference between the recoverable amount and the carrying amount is the amount of the impairment and is expensed by creating an allowance for possible losses.

The following entry is made for the amount of the calculated impairment:

Dt - expenses for creating provisions for loan impairment,

Kt - provisions for loan impairment.

The following posting is made for the credit recovery amount:

Kt - income from the restoration of the cost of loans.

For bad loans, a reserve is created in the amount of 100% of the loan amount.

Loans are written off when no economic benefits are expected from them. Bad loans are written off as follows:

Dt - provisions for loan impairment,

Kt - issued loans.

The recovery of previously written off loans is reflected in the bank's income as follows:

D-t - cash,

Kt - income from the recovery of written-off loans.

Interest income recognition

Interest income is recognized on all loans, including impaired and overdue loans. Interest income is accrued by applying the effective interest rate to the carrying amount of the loan.

The amount of accrued interest income is determined by the following formula:

Book value at the beginning of the period x effective interest rate per year / number of periods.

The original effective interest rate is used as the effective interest rate.

Interest income is recognized as follows:

D-t - accrued interest receivable,

Kt - interest income.

Example 2. Impairment of loans (Table 1)

Table 1

Year	Cash flows by treaty	Percent losses monetary flows in a year	Expected monetary streams Column 2 x column 3	Effective percentage bid ERR column 4	real price NPV column 5 and column 4	Impairment Delta columns 6
1	2	3	4	5	6	7
Jan 1 2001	-10 000		-10 000	10,21%	10 000,00
Dec 31 2001	1 200	0,01	1 188		9 833,29	166,71
Dec 31 2002	1 200	0,02	1 176		9 661,55	171,74
Dec 31 2003	1 200	0,05	1 140		9 508,28	153,28
Dec 31 2004	1 200	0,07	1 116		9 363,35	144,93
Dec 31 2005	1 200	0,07	1 116		9 203,62	159,73
Dec 31 2006	1 200	0,09	1 092		9 051,58	152,04
Dec 31 2007	1 200	0,11	1 068		8 908,01	143,57
Dec 31 2008	1 200	0,13	1 044		8 773,77	134,23
Dec 31 2009	1 200	0,14	1 032		8 637,83	135,94
Dec 31 2010	11 200	0,15	9 520		0,00	0,00
Total 1362.17

On January 1, 2001, the bank made 10 loans totaling $1,000 each; term - 10 years; coupon income at a rate of 12% per annum is paid once a year - on December 31. Each of these loans, individually, is not a large loan, and therefore the bank performs an impairment calculation for a group of loans in the amount of USD 10,000.

Determine the percentage of cash flow losses for the year.
Calculate expected cash flows.
Calculate the effective interest rate using the internal rate of return (IRR or IRR) function.
Calculate the present value based on the expected cash flows using the net present value (NPV or NPV) function.
Calculate the amount of impairment that results from both the reduction in expected cash flows from the loan and the effect of discounting those flows.

accounting entries

D-t - loans - $ 10,000,

Kt - cash - 10,000 dollars.

Dt - the cost of creating reserves - $ 166.71,

Kt - allowance for impairment of loans - 166.71 dollars.

Dt - the cost of creating reserves - $ 171.74,

Kt - allowance for impairment of loans - 171.74 dollars.

Example 3. Accounting for loans at below market rates

On January 1, 2000, the bank issued a loan in the amount of 10,000 rubles; term - 5 years; coupon rate - 5%, paid annually. The market rate at which a borrower could obtain a similar loan from other banks is 10%. Therefore, 10,000 rubles. may not be the fair value of the loan. Discounting the expected cash flows at the market rate of 10%, we get the fair value of the loan in the amount of 8105 rubles. The resulting difference is 1895 rubles. - is reflected in the income statement as "loss from issuing loans at below market rates".

Below is a table of depreciation and recognition of interest income (Table 2).

table 2

accounting entries

D-t - loans - 8105 rubles,

D-t - loss from issuing loans at below market rates - 1895 rubles,

Kt - cash - 10,000 rubles.

D-t - accrued interest receivable - 500 rubles,

D-t - loans - 310.5 rubles,

Kt - interest income - 810.5 rubles.

D-t - cash - 500 rubles,

Kt - accrued interest receivable - 500 rubles.

Repo and reverse repo

Securities sale and repurchase transactions (repo and reverse repurchase agreements) are financial instruments and are accounted for in accordance with IAS 39. Although the object of these transactions is securities, they are nonetheless, by their nature, lending transactions where securities are used as collateral loan obligations. A bank that sells securities for repo transactions may use securities of the "trading" and "available for sale" categories. For correct reflection in accounting for repurchase and reverse repurchase agreements, the provisions of IAS 39 on the recognition and derecognition of financial instruments should be reviewed in detail.

Example 4. Bank A lends money to Bank B in exchange for securities as collateral for a loan. Bank B gives the securities to Bank A. Bank A has the right to sell the securities until the end of the contract. The term of the repo agreement is three months.

The value of the securities increases during the term of the agreement. Bank A sells securities. Bank A buys back the securities before the end of the agreement in order to return them to Bank B. Bank B repays the loan with interest and receives back securities with a higher value. The category of securities is "held for sale".

Loan - 90,000 rubles. for a period of 90 days at 10% per annum. Date of agreement and issuance of the loan - February 1, 2005.

Bank A account

Dt - repo agreement - 90,000 rubles,

D-t - accrued interest receivable - 690 rubles,

Kt - interest income - 690 rubles.

Sale of securities for 95,000 rubles:

Dt - cash - 95,000 rubles,

Kt - obligation under repo agreements - 95,000 rubles.

D-t - accrued interest receivable - 740 rubles,

Kt - interest income - 740 rubles.

Dt - accrued interest receivable - 764 rubles,

Kt - interest income - 764 rubles.

By the end of the contract, bank A buys back securities at 96,000 rubles:

D-t - loss from the sale of securities - 1000 rubles,

Dt - obligation under repo agreements - 95,000 rubles,

Kt - cash - 96,000 rubles.

Bank B repaid the loan:

Kt - repo agreement - 90,000 rubles.

Bank B repaid the interest:

Dt - cash - 2194 rubles,

Kt - accrued interest receivable - 2194 rubles.

Net effect of the transaction on Bank A. Balance sheet:

increase in cash - 1194 rubles.

Income and expense statement:

interest income - 2194 rubles;

loss from the sale of securities - 1000 rubles;

clean financial results- 1194 rubles.

Bank B account

Dt - cash - 90,000 rubles,

Kt - reverse repo agreement - 90,000 rubles.

Reclassification of securities:

D-t - securities sold under repo agreements - 90,000 rubles,

Kt - securities - 90,000 rubles.

90,000 x 10% = 90,000 x 10% x 28/90 (365 days a year, 28 days a month).

Dt - interest expense - 690 rubles,

Kt - accrued interest payable - 690 rubles.

Dt - interest expense - 764 rubles,

Kt - accrued interest payable - 764 rubles.

Dt - interest expense - 740 rubles,

Kt - accrued interest payable - 740 rubles.

Loan repayment:

D-t - reverse repo agreement - 90,000 rubles,

Kt - cash - 90,000 rubles.

Interest repayment:

Dt - accrued interest payable - 2194 rubles,

Kt - cash - 2194 rubles.

Reclassification of securities after receiving back from bank A:

D-t - securities - 90,000 rubles,

Kt - securities sold under repo agreements - 90,000 rubles.

Revaluation of securities at 96,000 rubles:

Dt - securities - 6000 rubles,

Kt - income from revaluation - 6000 rubles.

Net effect of the transaction on Bank B. Balance sheet:

reduction of funds - 2194 rubles,

increase in the value of securities - 6000 rubles,

net change - 3806 rubles.

Income and expense statement:

income from revaluation - 6000 rubles,

interest income - 2194 rubles,

net financial result - 3806 rubles.

A. Dallakyan

Senior consultant,

company KPMG, Moscow

specialist in financial reporting of Rusfinance Bank LLC.

Under IAS 39, financial assets carried at amortized cost are tested for impairment in accordance with the “incurred loss” model ( incurred loss model). This model permits loss recognition only if there is a so-called loss event that occurred prior to the balance sheet date and is indicative of a loss. Losses from expected future events cannot be recognized as a loss in the current period.

In a global financial crisis a clear disadvantage of this approach was the untimely recognition of losses in the financial statements, which could have been predicted long before the default occurred.

In addition, the crisis revealed the following shortcomings of the model:

Recognition of inflated interest income prior to the “loss event”;

The use of different approaches to identifying and measuring "loss events", which leads to inconsistent reporting of amounts in the income statement, as well as the inability to compare the provisions created by different companies;

The creation by incurred losses, separated from probable losses, of an information deficit, mainly with changes in credit risk tool.

Numerous criticisms existing model from many leading institutions, including the G20 and the Financial Stability Board ( international organization, created by the G20 countries at the London Summit - 2009 with the aim of developing and maintaining policies in the field of global financial stability), predetermined the need for changes in the approach to the depreciation of financial instruments. The result of the work of the IASB in this direction was the draft standard "Financial Instruments: Amortized Cost and Impairment". This project represents one of the three parts of the revision of the accounting for financial instruments under IAS 39 and involves the issuance of an additional section of IFRS 9 on the impairment of financial assets recognized at amortized cost.

The IASB identifies as the main objectives of the project:

Optimization of the approach to accounting for the impairment of financial instruments by more timely recognition of expected credit losses;

Increasing the transparency of the formation of reserves created for credit losses.

Expected Loss Model

In contrast to the current approach to impairment, the IASB introduced an "expected loss" model ( expected loss model) based on expected cash flows, including credit losses. It should be noted that the current 'incurred loss' model is also based on expectations, but the projections are mostly related to additional revenues (for example, from the sale of collateral) rather than credit losses.

As mentioned, the pre-existing model has been heavily criticized mainly for recognizing impairment losses too late and unevenly, as well as reflecting inflated interest income before the “loss event” occurs. The proposed model is designed to solve these problems. The main idea is that the effective interest rate is now determined based on the future cash flows projected, taking into account credit losses when the instrument is issued. This rate is used to calculate interest income over the life of the instrument. If the lender's initial default expectations are realistic over the life of the loan, an immediate impairment loss is not recognized in the statement of comprehensive income. In this case, an impairment loss can only be recognized as interest income forfeited, provided that, at the time of issuance, the lender estimated the possible future flows of the instrument to be less than the contractual ones. Thus, losses are evenly distributed over the life of the instrument.

If, over time, the lender revises its original default expectations for the worse, the loss is recognized immediately in the statement of comprehensive income. This loss is the amount by which the amortized (carrying) amount of the instrument at the end of the period is adjusted to retain the original effective rate, subject to changes in future receipts. positive changes expectations are recognized as income.

More timely loss recognition under the new approach is achieved because the model does not require a “loss event” indicative of an impairment of an asset. Losses are now recognized at more than early dates based on projected or expected credit losses.

In table. Table 1 details the main aspects of accounting for impairment of amortized financial instruments under the “incurred” and “expected loss” models.

Table 1

Fundamentals of impairment of financial instruments

according to "incurred" and "expected losses" models

(for instruments with a fixed rate)

	Loss Incurred Model	Expected Loss Model
*Determination of the original effective interest rate*	Future cash flows are included in the calculation of the rate, excluding credit losses that have not been incurred. Most often, such flows are contractual payments.	The rate calculation involves future cash flows, projected taking into account possible credit losses
*Impairment loss recognition*
moment of recognition	Losses are recognized in the statement of comprehensive income as incurred.	Losses are recognized automatically when there is a negative change in previous expectations for credit losses or future flows. If expectations remain constant over the period of validity, no loss is recognized
Recognition condition or "loss event"	Recognition of a loss requires an event that indicates that the asset is impaired	The existence of a “loss event” is not considered as a condition for the recognition of an impairment, but can be used to predict future cash flows
Scope of initial recognition	The difference between the carrying amount of an asset and current value expected future cash flows (excluding future credit losses that have not been incurred), discounted at the original effective interest rate	The difference between the asset's carrying amount (before repricing) and the present value of renegotiated future cash flows, discounted at the original effective interest rate
Loss recovery	The amount of the impairment loss is reduced as a result of favorable events (for example, an increase credit rating). Reversals of impairment losses are recognized as income in the statement of comprehensive income current period. When a loss is reversed, the adjusted carrying amount of the asset must not exceed the carrying amount that would have existed without impairment	A reversal of an impairment loss is recognized in the statement of comprehensive income as an automatic gain on positive changes in previous credit loss expectations or future flows. When a loss is reversed, the adjusted carrying amount of the asset must not exceed the present value of future contractual payments
*Income recognition*
General provisions	Income is recognized in the statement of comprehensive income and calculated based on the original effective rate
Scope of recognition	The amount of income recognized is independent of expected credit losses as the effective rate used in income calculation is based on contractual payments	Revenue is recognized at a lower amount due to the lower effective rate that includes future credit losses
*Adjustments to the carrying amount of an asset*	The amortized cost of the asset is adjusted to the present value of expected future cash flows (excluding future credit losses that have not been incurred), discounted at the original effective interest rate	The amortized cost of the asset is adjusted to the present value of the revised future cash flows, discounted at the original effective interest rate Let's compare the impact of the current and proposed models on the statement of comprehensive income and the carrying amount of the instrument using an example.

Comparison of the impact of the current and proposed models on the statement of comprehensive income and the carrying value of the instrument will be considered using an example.

Example

Expected Loss Model

A loan has been issued with the following parameters:

Loan volume - 200 000 y. e.;

Annual interest rate - 10%;

Placement term - 5 years;

Interest is repaid annually;

The repayment of the principal amount of the debt occurs at the end of the term of the contract.

At the time of placement, contractual and expected flows are presented in the following way(Table 2).

table 2

on the loan at the time of placement, c.u. e.

Period	Contract payments	Default rate (DS), %	Expected payments

The cumulative default rate is calculated using the formula

KDS n= KDS n- 1 + DC n x P n - 1. (1)

If expectations are not revised during the life of the loan, the following indicators are reflected in the financial statements (Table 3).

Table 3

Financial reporting indicators

during the term of the loan, e.

Period	Interest Income (P&L)	Amount due
			(1) + (2) - (3)	(1) + (2) - (3) + (4)

All calculations are based on the original effective interest rate (6.51%), determined taking into account the expected credit losses at the time the instrument is issued.

Let us consider a situation where the creditor's expectations change negatively only once during the term of the contract. Suppose that at the end of the second year, the lender predicted an increase in the default rate and a decrease in the volume of future payments expected to be received as follows (Table 4).

Table 4

Contractual and forecast cash flows

on the loan at the end of the second year, c.u. e.

Period	Contract payments	Default rate (DS), %	Cumulative default rate (CDR), %	Percentage of payments expected to be received (P), %	Expected payments

Under these conditions, the following indicators are reflected in the financial statements of the creditor (Table 5).

Table 5

loan after the revision of expectations, at. e.

Period	Carrying amount of the loan at the beginning of the period	Interest Income (P&L)	Amount due	Carrying value of the loan at the end of the period (before the revision of expectations)	Impairment losses (book value adjustment) (P&L)	Carrying value of the loan at the end of the period (after the revision of expectations)
				(1) + (2) - (3)		(1) + (2) - (3) + (4)





Total					(45 081)

All calculations are also based on the original effective interest rate (6.51%), to maintain which it is necessary to adjust the carrying amount of the loan at the end of the second year by 45,081 c.u. e. This amount must also be recognized as a loss in the statement of comprehensive income. The adjustment is calculated according to the formula

IL= CA- NPV, (2)

where IL- an impairment loss or adjustment to the carrying amount;

CA- book value of the loan at the end of the period (before the revision of expectations);

NPV- the present value of revised future cash flows, discounted at the original effective interest rate.

In this case SA at the end of the second year is 185,591 c.u. e., NPV- 140 511 c.u. e.

NPV= 17 000 / (1 + 0,0651) + 14 450 / [(1 + 0,0651)2] + 135 108 / [(1 + 0,0651)3] = 140 511.

Loss Incurred Model

For comparison, consider a similar example using the “incurred loss” model.

Without depreciation, the book value of the asset, as well as interest income, are presented as follows (Table 6).

Table 6

Financial statement indicators during the period of validity

loan, excluding impairment, c.u. e.

Period	Carrying amount of the loan at the beginning of the period	Interest income	Amount due	Carrying amount of the loan at the end of the period
				(1) + (2) - (3)

Calculations are based on the original effective interest rate (10%). Compared to the previous model, the rate is higher due to higher future receipts, excluding possible credit losses.

For a simplified comparison of the two models, we will assume that the lender was not mistaken in expectations and the credit losses predicted in the previous example correspond to the future reality. In this case financial indicators, reflected according to the “incurred losses” model, take the following form (Table 7).

Table 7

Financial statement indicators during the period of validity

loan subject to impairment, c.u. e.

Period	Amortized cost of the loan at the beginning of the period	Interest Income (P&L)	Amount due	Amortized cost of the loan at the end of the period (excluding impairment)	Impairment losses (P&L)	Carrying amount of the loan at the end of the period (adjusted for impairment)
				(1) + (2) - (3)





Total					(93 443)

The calculation uses a more accurate value of the effective interest rate - 6.51139108625425%.

The calculation of impairment losses in this case is carried out according to the formula

IL= AC- NPV, (3)

where IL- impairment loss;

AC- amortized cost of the loan at the end of the period (excluding impairment);

NPV- the present value of future cash flows (excluding future credit losses that have not been incurred), discounted at the original effective interest rate.

In our case, the difference between the amortized cost and the current value of future flows is zero, however, management decided to recognize losses on the instrument in the amount of overdue debt, i.e. due to the fact that economic benefits were not received. Other than a deterioration in payment discipline, there were no other “loss events” indicating the possibility of future defaults.

Comparative analysis of the two models is presented in Table. eight.

Table 8

Main differences between expected and incurred loss models

Index	Expected Loss Model	Loss Incurred Model
Effective interest rate
Total interest income
Aggregate impairment loss
Total net income

Under both models, the lender recognizes the same total net income in its financial statements. However, the “expected loss” model assumes a more even and timely reflection losses through a lower effective interest rate that takes into account future credit losses and therefore lowers the interest income recognized on the instrument. The “incurred loss” model demonstrates the recognition high income(even in the presence of negative expectations), as well as too late and sharp reflection of losses.

Despite the fact that the proposed approach to impairment quite logically solves the main problems of the current model, for which it has been sharply criticized by the global financial community, the “expected loss” model is also not ideal.

There are a number of operational and technical challenges that prevent proper application of this model.

The proposed approach requires a constant quantitative and qualitative assessment of possible credit losses both at issuance and throughout the life of the instrument. In some cases, forecasts are needed for too long terms. Given the size and structure of many loan portfolios, this requirement can become a serious difficulty on the way to the application of this model. The only solution to the problem seems to be a revision of the possibilities automated systems accounting, as well as their integration with risk management systems. The volume of labor and financial costs in this case, no doubt. But even with successful automation, a large proportion of credit expectations will be formed on the basis of management assumptions, which will entail a high correlation between judgments and financial results.

Although the draft standard is in the process of being finalized and the Council periodically issues additions to the original proposals, the fundamental basis of the proposed model is likely to remain unchanged.

The final publication of the standard is planned for the second quarter of 2011. Although it is expected to apply for accounting periods beginning January 1, 2014, financial institutions already now it is worth thinking about the costs and timing of a rather complicated transition to a new model of depreciation of financial instruments carried at amortized cost.