Credit Impairment – Differences between U.S. GAAP and IFRS

The IASB and the FASB issued new guidance for credit impairment accounting, with IFRS 9 and ASC 326 providing specific guidance for instruments that suffer credit deterioration. These assets have different definitions under each regime, potentially leading to differences in their application 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”. This 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

IFRS 9 doesn’t record an allowance when a POCI asset is initially recognised, whereas ASC 326 requires an initial allowance to be estimated and recorded, added to the purchase price and not reported as a credit loss expense.

Under IFRS 9, at each subsequent reporting date, changes in lifetime expected credit losses since initial recognition, discounted at the credit-impaired effective interest rate, are recognised as a loss allowance. Changes are recognised as an impairment gain or loss, including favourable changes, without limit on the reversal of impairment losses. 

Under ASC 326, favourable and unfavourable changes in the allowance for credit losses are recorded as a credit loss expense at each subsequent reporting date.

Moreover, IFRS 9 applies the credit-adjusted EIR to the amortised cost for interest recognition, while ASC 325, generally applies the effective interest rate to the gross carrying amount.