Impairment of Financial Assets in the Era of IFRS

Abstract

The article seeks to discuss issues relating to impairment of financial assets that will be encountered by banks once they move towards IFRS. Existing stipulations of IAS 39 on impairment is woven around an Incurred Loss Model wherein triggers in the form of objective evidence of impairment are required for recognizing impairment losses. Once it is established that there is objective evidence of impairment, the amount of loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate. This is in variance with current provisioning norms for Non Performing Assets issued by RBI, which are essentially formula based. Now, IASB has issued an Exposure Draft seeking to amend IAS 39 and one of the major amendments is moving to Expected Loss Model for impairment from Incurred Loss Model. International Accounting Standards Board expects that the new requirements will not be mandatory before January 2012. Thus, while Indian banks adopt the existing IFRS in April 2011, it may undergo a major revision by January 2012 and accounting/regulatory bodies will have to take note of this.