The IASB and the FASB have each issued new guidance for impairment accounting. Both iIFRS 9 and ASC 326 provide specific guidance for instruments that suffer credit deterioration since their origination. These assets have different definition under each regime, which could lead to differences in application, in terms of the instruments subjected to credit impairment, and recognition thereof.
POCI vs PCD Assets
IFRS 9 defines POCI as “purchased or originated financial asset(s) that are credit-impaired on initial recognition” and indicates that “a financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred.”
ASC 326 defines PCD as: “acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination.”
Accounting for POCI vs PCD assets
Under IFRS 9, no allowance is recorded when a POCI asset is initially recognised. Under ASC 326, an initial allowance is required to be estimated and recorded and it is added to the purchase price rather than being reported as a credit loss expense.
Under IFRS 9, at each subsequent reporting date, the cumulative changes in lifetime expected credit losses since initial recognition, discounted at the credit-impaired effective interest rate is recognised as a loss allowance. The amount of any change in lifetime expected credit losses is recognised as an impairment gain or loss. Favourable changes in lifetime expected credit losses are not limited to the reversal of previously recognised impairment losses.
Under ASC 326, at each subsequent reporting date, both favourable and unfavourable changes in the allowance for credit losses are recorded as a credit loss expense.
There is also a difference in the accounting for interest recognition. Under IFRS 9, the credit-adjusted EIR is applied to the amortised cost, whereas, under ASC 325, generally, the effective interest rate is applied to the gross carrying amount.
Source: GAAP Dynamics
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