Impairment of financial assets

The International Accounting Standards Board (IASB) has published a proposal for a new accounting model for impairment of financial assets. Currently IAS 39, Financial Instruments: Recognition and Measurement, states that a financial instrument is impaired and impairment losses are incurred if a loss event occurred and this loss event had a reliably measurable impact on the future cash flows. Which of the following approaches is the recommended new accounting model for impairment of financial assets?

Expected credit losses approach

The incurred loss approach

Contractual cash flows approach

Effective interest rate approach

In 2009, the IASB published an ED which proposed adjusting for expected credit losses through adjusting the effective interest rate of a financial instrument. What was the reasoning behind this proposal?

This works conceptually and is very practicable

Expected credit losses are usually priced into the interest rate to be charged and should be reflected in the yield on the financial asset

Expected credit losses are not usually priced into the interest rate to be charged

Changes in credit loss expectations were not to be recognised as incurred as these changes would have been priced into the asset

In 2011, the IASB and the FASB issued a joint supplement which proposed removing interest adjustment from the recognition of impairments and since then, the bodies have used this approach, which is the basis of the current ED. However,the FASB have recently published its own proposed model. What is the key difference between the IASB`s proposals and those of the FASB?

The FASB requires varying measurement models for all financial instruments when determining the impairment provision

The FASB model does not retain many of the jointly developed core principles

The FASB requires a single measurement model for all financial instruments when determining the impairment provision

The FASB requires entities to recognise a charge on recognition equal to the undiscounted value of lifetime expected credit losses

The IASB proposals require the recognition of expected credit losses for certain financial assets by creating an allowance/ provision based on either 12-month or lifetime expected credit losses. What is the likely result of this proposal?

This is likely to result in later recognition of credit losses

This is likely to result in earlier recognition of credit losses

This is likely to result in lack of credibility in the provision for credit losses

This is likely to result in fluctuating provision for credit losses

The ED applies to various financial assets measured at amortised cost and at fair value through other comprehensive income under IFRS 9 Financial Instruments. Which of the following financial instruments does the ED not apply to?

Trade receivables

Irrevocable loan commitments

Loans

Financial guarantee contracts that are accounted for at fair value through profit or loss under IFRS 9

The impairment amount recognised depends on whether or not the financial instruments have significantly deteriorated since their initial recognition. The ED describes three stages. Which of the following is not a stage described in the ED?

Financial instruments whose credit quality has significantly deteriorated since their initial recognition

Financial instruments whose credit quality has not significantly deteriorated since their initial recognition

Financial instruments for which there is no objective evidence of an impairment as at the reporting date

Financial instruments for which there is objective evidence of an impairment as at the reporting date

The ED proposes a simplified approach for trade receivables which will apply to trade receivables that do not constitute a financing transaction. Which of the following is not a policy choice for trade receivables?

For long-term trade receivables, an entity has an accounting policy choice between the general model and the model applicable for trade receivables

For trade receivables, always measure the impairment by applying the two stage approach

For trade receivables, always measure the impairment at the present value of expected cash shortfalls over the remaining life of the receivables

For lease receivables under IAS 17, an entity has an accounting policy choice between the general model and the model applicable for trade receivables

In the case of purchased or originated credit-impaired financial assets, the ED states that rather than apply the two-stage approach, changes in lifetime expected credit losses since initial recognition are recognised directly in profit or loss. A credit loss allowance is not recognised on initial recognition. Why is a credit loss allowance not recognised on initial recognition?

The incurred loss approach is a better method of providing for impairment

Any changes in the lifetime expected credit losses that are not incorporated in the credit-adjusted effective interest rate

It conflicts with the FASB`s single measurement model

The lifetime expected credit losses would be reflected in the credit-adjusted effective interest rate

How are expected credit losses determined under the ED?

Losses should not reflect the time value of money

The best-case estimate

Worst-case estimate

Using an unbiased and probability-weighted approach

The ED sets out the specific approaches, which should be used to estimate expected credit losses, but stresses that the certain factors should be taken into account. Which of the following factors would not be taken into account when estimating credit losses?

The entity should consider a range of possible outcomes, and the probability of credit losses

The entity should discount the expected credit losses to the reporting date using a discount rate that is between the risk-free rate and the effective interest rate for a financial asset

The entity should discount the expected credit losses to the reporting date using the risk-free rate for a loan commitment and financial guarantee contract

The entity should consider information that is reasonably available without undue cost and effort, including information about past events, current conditions, and reasonable and supportable forecasts of future events

Impairment of financial assets

In 2009, the IASB published an ED which proposed adjusting for expected credit losses through adjusting the effective interest rate of a financial instrument. What was the reasoning behind this proposal?

The IASB proposals require the recognition of expected credit losses for certain financial assets by creating an allowance/ provision based on either 12-month or lifetime expected credit losses. What is the likely result of this proposal?

The ED applies to various financial assets measured at amortised cost and at fair value through other comprehensive income under IFRS 9 Financial Instruments. Which of the following financial instruments does the ED not apply to?

The impairment amount recognised depends on whether or not the financial instruments have significantly deteriorated since their initial recognition. The ED describes three stages. Which of the following is not a stage described in the ED?

The ED proposes a simplified approach for trade receivables which will apply to trade receivables that do not constitute a financing transaction. Which of the following is not a policy choice for trade receivables?

How are expected credit losses determined under the ED?

The ED sets out the specific approaches, which should be used to estimate expected credit losses, but stresses that the certain factors should be taken into account. Which of the following factors would not be taken into account when estimating credit losses?

You scored

0

out of

0

Test passed. Enter your details to download your certificate. Your certificate will also be sent to you by email.

Our sites

Useful links

Using this site

Contact us

Planned system updates