06 February 2019

WSBI-ESBG responds to IASB Tentative Agenda Decision curing of a credit-impaired financial asset

WSBI-ESBG agrees with the IFRS Interpretation Committee´s technical analysis based on the current IFRS 9 requirements concluding that unrecognised interest should be presented as a credit impairment gain in the profit and loss account following the cure of a credit-impaired financial asset.

Notwithstanding the technical analysis made by the Committee, WSBI-ESBG believes that the question submitted may lead to a further and deeper analysis of whether the presentation as a credit impairment gain faithfully depicts the economics of companies using IFRS financial statements. In particular, WSBI-ESBG believes there may be strong arguments in certain jurisdictions to present such amounts in the net interest margin – NIM - based not only on giving more predominance to the nature of the cash flows being recovered but also considering (i) whether the originator of the credit has a contractual unconditional right to deduct from the unrecognised interests the amounts recovered from the debtor, and (ii) internal management practices that rank the precedence of those amounts.

WSBI-ESBG further develops this view below and provides additional comments:

- Income and expenses are presented in the profit and loss account usually based on their nature, therefore, the expectation would be that all contractual interests accrued during the life of the credit are reflected, if applicable, within interest margin.

- Interest margin typically reflect the results of financing activity of banks. Registering unrecognised interest in the loss allowance caption would lead users of financial data to distorted ratios for example on the loan average profitability. 

- Users also expect that ‘reversal of loss allowance’ corresponds to the amounts previously recognised for this concept in the profit and loss account. Impairment gains, although possible in accordance with IFRS 9, are not very understandable and difficult to explain.

- General accepted practice is to allocate the amounts recovered first to past due interests when such a right is established within contractual terms or prior to beginning with the formal recovery process for a credit-impaired financial assets that is past-due In such cases, financial entities may consider that first they recover the interests accrued for late payment, then the contractual interest, and lastly the pending principal. Among other reasons for setting up such a rank would be increasing the probability to recover the unrecognised interests if a claim was filled with the debtor in case of new defaults.

- Once the debtor is no longer in the repayment process, but in the recovery phase, then we would agree that general accepted practice is to give precedence in any amounts being recovered (either in cash or forborne assets) to the pending principal before considering that any interests were recovered. In such cases the expected loss is very probable and financial entities objective is to minimize such loss.

Full position paper

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