IFRS 9. Application of par. B5.4.6 for overdues

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Pawel
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IFRS 9. Application of par. B5.4.6 for overdues

Post by Pawel »

Hey there!

I have a question regarding financial assets. Let's assume that we have a simple loan, and a borrower didn’t make one of the regular loan payments (i.e. past due payment). Let’s assume also that despite overdue amount our loan is not credit-impaired (just for simplicity).

I think that the occurrence of overdues inevitably means changes in future cash flows. And my question is as follows: why do we not apply provisions of B5.4.6 (IFRS 9) in the situations of changes in cash flows due to overdues?

Appreciate your thoughts and feedback

Thank you!
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Marek Muc
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Re: IFRS 9. Application of par. B5.4.6 for overdues

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Because this paragraph excludes the impact of changes in estimates of expected credit losses?
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JakobLavrod
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Re: IFRS 9. Application of par. B5.4.6 for overdues

Post by JakobLavrod »

Hi!
I can only speak for how we do this, but we do revise the gross-carrying amount, at least partially. Since the customers earn overdue fees, these will accrue interest using the nominal rate, so the balance the customer owes us goes up. However, the recalculation is less formal than what is described in B5.4.6, but still, it will capture most of the effect.
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Marek Muc
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Re: IFRS 9. Application of par. B5.4.6 for overdues

Post by Marek Muc »

Thanks for chiming in Jakob. So when a customer incurs an overdue fee - how do you account for it?
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JakobLavrod
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Re: IFRS 9. Application of par. B5.4.6 for overdues

Post by JakobLavrod »

Hi!
We add it to the gross carrying balance since what happens is that the customer's monthly payments go up because of them (they have to amortize of the fee for the rest of the loan).
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Pawel
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Re: IFRS 9. Application of par. B5.4.6 for overdues

Post by Pawel »

Hello!

Thank you, guys, for your ideas!

Sorry for my late response)
Let me add to this discussion my opinion regarding this topic
Please note that it’s just my own thoughts and I still don’t know the exact answer…

I think that we shouldn’t apply provisions of B5.4.6 (IFRS 9) in the situations when overdue payment occurs.
It’s because the occurrence of overdues doesn’t mean changes in future cash flows. Overdues are completely about past cash flows.

Initially and under other equal conditions, the lender has no grounds (neither in the form of formal re-agreements with the client (i.e. modification / par. 5.4.3), nor in the form of his own expectations (i.e. revision of estimates / par. B5.4.6) to include overdue debt in the schedule of future cash flows. So, overdues don’t create any changes in future cash flows.

Maybe that's why, in practice, we use the following formular in the case of overdues:
GCA = PV of Future CFs (i.e. original CFs) + Past Dues (including penalty interests at nominal rate / penalty rate)
* Gross Carrying Amount
Last edited by Pawel on 23 Nov 2022, 10:51, edited 1 time in total.
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Re: IFRS 9. Application of par. B5.4.6 for overdues

Post by JakobLavrod »

Thank you for the answer Pawel!

"Initially and under other equal conditions, the lender has no grounds (neither in the form of formal re-agreements with the client (i.e. modification / par. 5.4.3), nor in the form of his own expectations (i.e. revision of estimates / par. B5.4.6) to include overdue debt in the schedule of future cash flows. So, overdues don’t create any changes in future cash flows."

I would strongly dispute that. The customer has agreed to make us certain payments. If the customer does not pay and is therefore overdue, we have a contractual right to add on overdue fees (there is explicit language on this in the contract). As such, the customer being later triggers an event in which we can increase the gross carrying amount, or is this me misinterpreting what we are doing?

Interestingly, in Sweden, where I work, there is actually a discussion to legally ban pure "overdue fees", but that is a separate matter.
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Pawel
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Re: IFRS 9. Application of par. B5.4.6 for overdues

Post by Pawel »

Thank you, JakobLavrod!

It’s interesting. I think that we need to differentiate situations when we have overdue fees and situations when we have overdue (penalty) interests.

Before (in my previous post) I meant a very simple situation when we have only overdue amounts and, for example, a slightly increased penalty rate that applies only to overdue debt (i.e. without overdue fees).

But in relation to overdue fees, unfortunately, I have no clue. For me it’s very interesting to get to know about your approach in relation to overdue fees. Thank you!

Additionally, I think, we should be very careful in the case of overdue fees. We need to clearly understand the nature of these fees. Because, for example, in this reliable source it’s alleged that penalty fees (due to ovedues) are accounted for under IFRS 15, but not IFRS 9 …

Please see this article:
https://www.bdo.com.au/en-au/accounting ... by-lenders
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Re: IFRS 9. Application of par. B5.4.6 for overdues

Post by JakobLavrod »

Agree that this is indeed interesting. In such case that would indicate that one should not really include the "fee balance" with the other part of the loan. Will see if I can understand this better ;)
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