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7.13 Impairment of financial assets
Publication date: 31 Mar 2023
us IFRS & US GAAP guide
The impairment accounting approach under both US GAAP and IFRS is an expected loss model.
7.13.1 Impairment—scope
The scope of instruments subject to the IFRS 9 impairment requirements is similar to the scope of instruments subject to ASC 326. Both apply to financial assets measured at amortized cost, as well as to off-balance sheet exposures, such as loan commitments and guarantees. Neither apply to investments in equity instruments or to instruments measured at fair value through profit or loss. Explicit scope differences between the standards do exist; however, they are mostly limited to specific areas.
- Loans and receivables between entities under common control are not in the scope of ASC 326 but are subject to IFRS 9 in the separate financial statements of the lender.
- Reinsurance receivables are not in the scope of IFRS 9 but are in the scope of ASC 326 for purposes of measurement of expected losses related to credit risk (although expected losses due to contractual coverage disputes or other noncontractual issues are not in the scope of either standard).
US GAAP |
IFRS |
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The CECL model applies to financial assets measured at amortized cost and certain off-balance sheet credit exposures, including:
A separate credit loss model applies to debt securities classified as available-for-sale.
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The IFRS 9 impairment model applies to:
Specific measurement provisions apply to purchased or originated credit-impaired assets.
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7.13.2 Impairment principles
The credit impairment accounting approach under both US GAAP and IFRS follows an expected loss model. Thus, under both standards, a “day 1 credit loss” will be recognized for most financial assets measured at amortized cost. However, the amount of loss will typically differ between the two standards. Many significant differences exist between the CECL model in US GAAP and the expected credit loss (ECL) model in IFRS, such as the three-stage model for impairment in IFRS compared to a consistent measurement method throughout the life of the instrument under US GAAP.
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IFRS |
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For instruments in the scope of the general CECL model, lifetime expected credit losses are recorded upon initial recognition of the instrument as an allowance for loan losses.
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An entity shall recognize a loss allowance for expected credit losses.
The IFRS impairment model contains three stages for measuring impairment losses based on the changes in credit quality of the instrument since inception.
Stage 1 includes financial instruments that have not had a significant increase in credit risk (SICR) since initial recognition or that have low credit risk at the reporting date. For these assets, an entity will typically record a 12-month ECL (i.e., the expected credit loss that result from default events that are possible within 12 months after the reporting date). It is not the expected cash shortfalls over the 12-month period, but the entire credit loss on an asset weighted by the probability that the loss will occur in the next 12 months.
Stage 2 includes financial instruments that have had a SICR since initial recognition (unless they have low credit risk at the reporting date and elect the practical expedient described in SD 7.13.8). For these assets, lifetime ECL is recognized, but interest revenue is still recognized on the gross carrying amount of the asset.
Stage 3 includes financial assets that have objective evidence of impairment at the reporting date. For these assets, lifetime ECL is recognized, and interest revenue is calculated on the net carrying amount (i.e., net of the credit allowance).
An entity is required to continually assess whether a SICR has occurred.
The ECL measurement must reflect the time value of money. The entity should discount the cash flows that it expects to receive at the effective interest rate determined at initial recognition, or an approximation thereof, to calculate ECL.
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The allowance for loan losses is a valuation account deducted from the amortized cost of the financial assets to present the net amount expected to be collected.
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"Credit losses" are defined as the difference between all contractual cash flows that are due to an entity in accordance with the contract and all the cash flows that the entity expects to receive, discounted at the original effective interest rate (EIR). Expected credit loss are recognized as a loss allowance.
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Each reporting period, changes in the estimate of expected credit losses are generally recognized through earnings as a credit expense or a reversal of credit expense.
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Each reporting period, the estimate of the loss allowance is adjusted, with changes recognized in profit or loss as an impairment gain or loss.
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7.13.3 Impairments—measurement of expected credit losses
US GAAP and IFRS contain guidance regarding the factors and methods that should be considered when forecasting expected credit losses. The frameworks agree on requiring the measurement to reflect the probability of loss occurring, even if the probability is low. Neither framework requires the use of a specific methodology for the measurement of the allowance for expected credit losses.
US GAAP |
IFRS |
The guidance requires that the allowance for loan losses be determined based on the amortized cost of the financial asset, which includes all premiums, discounts, and other adjustments. The use of some approaches to estimating the expected credit losses, such as discounted cash flow (DCF), already requires consideration of premiums and discounts included in the amortized cost. When using the DCF method, expected cash flows are discounted at the EIR of the financial asset.
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The ECL measurement must reflect the time value of money. The entity should discount the cash flows that it expects to receive at the EIR determined at initial recognition, or an approximation thereof, to calculate ECL.
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Loss rate approaches could also be used. When historic loss rates are not based on the amortized cost of the financial asset (but rather on the par value), an adjustment will need to be made to incorporate premiums and discounts..
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If a loss rate approach is used, time value of money needs to be considered. Hence, the cash shortfalls must be discounted using the effective interest rate to determine the credit loss on a present value basis, which would also consider premiums and discounts.
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7.13.4 Impairments—estimates
The estimate of expected credit losses under both standards should consider historical information (past events), information about current conditions, and reasonable and supportable forecasts of future events and economic conditions, as well as estimates of prepayments. Both standards use the words “reasonable and supportable” to describe the forecasts and forward-looking information, but neither defines exactly what is meant by that term. Under both standards, credit losses for assets are generally limited to the contractual period (with certain exceptions). Prepayments and extension options held by the borrower, which the borrower can unilaterally exercise, are taken into account under both frameworks.
US GAAP |
IFRS |
Under US GAAP, there is no explicit requirement in the standard to consider multiple forward-looking scenarios when measuring expected credit losses. However, the scenario used should be selected to adequately represent the expected credit losses.
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Under IFRS, a single forward-looking economic scenario would not fully meet the objective of IFRS 9 when there is a nonlinear relationship between the possible forward-looking economic scenarios and their associated credit losses. In such circumstances, more than one forward-looking scenario that is representative of the range of possible outcomes should be used.
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The CECL model requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). The measurement should include consideration of estimated prepayments but exclude expected extensions and renewals (unless the borrower is able to unilaterally exercise these options).
For off-balance sheet credit exposures, expected credit losses are estimated over the contractual period in which the entity is exposed to credit risk via a present contractual obligation to extend credit, unless that obligation can be unconditionally cancelled by the issuer. If a loan commitment can be unconditionally (i.e., unilaterally, and irrevocably) cancelled by the issuer, no estimate of expected credit losses is required for the unused or undrawn portion of the commitment.
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The maximum period to consider when measuring expected credit losses is the maximum contractual period (including extension options held by the borrower that the borrower can unilaterally exercise). Expected prepayments should also be considered in the measurement.
However, specific guidance regarding the period to consider for measurement of ECL applies to certain financial instruments that include both a loan and an undrawn commitment component. If the entity’s contractual ability to demand repayment and cancel the undrawn commitment does not limit its exposure to credit losses to the contractual notice period, expected credit losses are measured over the period that the entity is exposed to credit risk and expected credit losses would not be mitigated by credit risk management actions. This period might extend beyond the contractual notice period.
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7.13.5 Impairments—collective versus individual assessment
Under both frameworks, the grouping of instruments is performed based on shared or similar risk characteristics.
US GAAP |
IFRS |
When estimating CECL, reporting entities are required to calculate expected credit losses on a "pooled" basis when instruments have similar risk characteristics.
If financial instruments do not share similar risk characteristics, expected credit losses would be calculated on an individual basis, but must incorporate risk of loss that may be based on internal or external expected loss assumptions from groups of similar assets.
An entity’s estimate of expected credit losses should include a measure of the expected risk of credit loss, even if the risk is remote.
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IFRS 9 requires calculating a probability-weighted amount in the measurement of ECL. Hence, entities need to consider the possibility that a credit loss occurs even if the possibility is very low.
When reasonable and supportable information to measure lifetime ECL on an individual basis is not available without undue cost or effort, ECL should be recognized on a collective basis. Instruments are grouped on the basis of shared credit risk characteristics.
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7.13.6 Impairments—loan modifications and restructurings
Generally, the two frameworks have different models and consider different periods in accounting for modifications and restructuring of loans.
US GAAP |
IFRS |
A creditor should determine whether refinancing or restructuring of debt is a modification or a new loan.
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A creditor should determine whether modifications of the contractual cash flows of a financial asset result in modification or derecognition of the existing instrument. Modified assets should be assessed to determine whether a significant increase in credit risk has occurred, in the same way as it is assessed for any other financial instrument. If not, the loss allowance should be measured at 12-month ECL.
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The period over which credit losses are estimated should not include modifications or extensions (unless they are exercisable by the borrower and not unconditionally cancellable by the lender).
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The period to consider when measuring expected credit losses is generally the maximum contractual period (except as noted in SD 7.13.4 with respect to certain loan commitments, such as credit cards). However, the cash flows expected from the entity’s recovery activity upon default of a loan should generally be included in the measurement of ECL. The cash flows that an entity expects to receive on a default of a loan may be based on several different scenarios, such as taking no action; keeping the loan and restructuring it to maximize collections; selling the loan; or foreclosing on the loan and collecting the collateral. Those different scenarios are factored into the measurement of ECL for a portfolio when restructurings are expected.
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7.13.7 Impairments—reversion to historical information
The period over which it is necessary to estimate expected credit losses for a financial instrument may exceed the period for which a reporting entity can develop a reasonable and supportable forecast. Neither standard allows entities to assume zero expected credit losses due to an inability to develop a reasonable forecast.
US GAAP |
IFRS |
For periods beyond which an entity can develop a reasonable and supportable forecast, the guidance discusses reversion to historical loss information that reflects the contractual term of the financial instrument (or group of financial instruments) using a variety of reversion techniques, including reversion for specific inputs or for the entire estimate.
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Different methods for estimating ECL for periods beyond which an entity can develop a reasonable and supportable forecast could be acceptable depending on the facts and circumstances.
One such method is to use historical data as a base from which to measure ECL. Such data should be adjusted to reflect current conditions and forecasts of future conditions not reflected in the historical data and to remove the effects of the conditions in the historical period that are not relevant to the future contractual cash flows. Or, the most reasonable and supportable information might be the unadjusted historical information, depending on the nature of the historical information and when it was calculated, compared to the circumstances at the reporting date.
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7.13.8 Impairments—zero expected credit losses
Under the US GAAP CECL model, certain assets (e.g., US Treasury securities), for which the expectation of non-repayment is zero, do not require an estimate of expected credit losses. Under IFRS, on the other hand, entities are always required to consider the possibility that a credit loss occurs. Although US GAAP and IFRS are different in principle, the practical effect may be small.
Under IFRS, there is a practical expedient for assets with low credit risk, which applies, for example, to investment grade assets. For such assets, entities can choose to measure the impairment loss at the 12-month ECL and assume that no significant increase in credit risk has occurred (i.e., they can assume that the financial assets are always in “stage 1” as long as they remain investment grade).
US GAAP |
IFRS |
The CECL model generally requires that the estimate of expected credit losses include a measure of the expected risk of credit loss even if that risk is remote. However, expected credit losses do not need to be estimated when the expectation of nonpayment of the amortized cost basis is zero. These situations are not expected to occur frequently.
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When measuring expected credit losses, an entity should consider the risk that a credit loss may occur even if the possibility of a credit loss occurring is very low.
As an exception to the general model, if the credit risk of a financial instrument is low at the reporting date (e.g., the instrument is investment grade), the entity can measure impairment using 12-month ECL. It would not have to assess whether a significant increase in credit risk has occurred. This is an optional practical expedient. To qualify for this practical expedient, the instrument should meet the description of low credit risk in IFRS 9.
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7.13.9 Impairments—credit enhancements/collateral
Under both US GAAP and IFRS, the impact of collateral that is part of the same unit of account as the financial instrument is factored into the measurement of the expected credit loss. However, even if the asset is overcollateralized, there can still be an expected credit loss because the possibility of the collateral’s value declining must be considered.
A difference in measurement could arise between US GAAP and IFRS in some circumstances.
US GAAP |
IFRS |
If financial assets are secured by collateral that is part of the unit of account of the instrument, the expected credit losses should consider the impact the collateral will have in reducing credit losses. The estimate of expected credit losses should consider the current collateral value as well as the nature of the collateral, potential future changes in its value, and historical loss information for financial assets secured with similar collateral.
ASC 326 provides a number of specific provisions relating to collateralized instruments, including:
When assets have collateral maintenance requirements, the amount of collateral is continually adjusted as a result of changes in its fair value. In these arrangements, a reporting entity may estimate expected credit losses by comparing the fair value of the collateral to the asset’s amortized cost basis. If the collateral maintenance provisions require the counterparty to continually replenish the collateral to an amount equal to or greater than amortized cost, a reporting entity may determine that the expected credit loss is zero.
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When measuring ECL, the estimate of expected cash shortfalls should reflect the cash flows expected from collateral and other credit enhancements that are part of the contractual terms and are not recognized separately by the entity.
The estimate of expected cash shortfalls on a collateralized financial instrument reflects the amount and timing of cash flows that are expected from foreclosure on the collateral, less the costs of obtaining and selling the collateral. This is irrespective of whether foreclosure is probable (i.e., the estimate of expected cash flows considers the probability of a foreclosure and the cash flows that would result from it).
IFRS does not have a practical expedient for assets with collateral maintenance provisions. The possibility that a credit loss will occur should be taken into account based on its weighted-average probability. This means that for a collateralized loan, the possibility that the borrower may default before the collateral is replenished should be considered. For loans that are significantly over collateralized, this may result in a small ECL.
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7.13.10 Impairments—guarantees
For holders of guarantees, the standards have different criteria to assess whether the cash flows from the guarantees can be included in the measurement of the expected credit losses for the guaranteed asset. Guarantees issued that are not accounted for as insurance contracts or measured at FVTPL are in the scope of the impairment guidance and require an estimate of expected credit losses for the issuer.
US GAAP |
IFRS |
Credit enhancements, such as guarantees or insurance contracts, should be considered in the estimate of expected credit losses if they are part of the lending arrangement. A credit enhancement deemed to be a freestanding contract, however, should not be considered in the estimate of the expected credit losses - a guarantee entered into separate and apart from the guaranteed asset or entered into in conjunction with the asset that is legally detachable and separately exercisable should be accounted for separately.
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The estimate of expected cash shortfalls should reflect the cash flows expected from collateral and other credit enhancements that are part of or integral to the contractual terms and are not recognized separately by the entity.
If a financial guarantee is obtained at the date of initial recognition of the guaranteed loan, the cash flows from the guarantee could be included in the measurement of the allowance for the financial asset if the entity views it as being integral.
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The expected credit losses are measured and accounted for without regard to the initial fair value of the guarantee.
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After initial recognition, an issuer of a financial guarantee contract subsequently measures it at the higher of (1) the amount of the loss allowance and (2) the amount initially recognized less, when appropriate, the cumulative amount of income recognized in accordance with the principles of IFRS 15 (unless the guarantee was designated at FVTPL or arises upon a failed derecognition of a financial asset).
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7.13.11 Impairments—fair value hedge adjustments
Under both frameworks, the carrying amount of assets that qualify as the hedged item in a fair value hedge (e.g., fixed interest rate loan hedged against the exposure to interest rate risk) includes an adjustment for fair value changes attributable to movements in the hedged risk.
US GAAP |
IFRS |
The loss allowance is determined based on the amortized cost of the financial asset, which includes fair value hedge accounting adjustments (and all premiums and discounts).
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Although IFRS does not have explicit guidance, we believe that the measurement of ECL on an asset that qualifies as a hedged item in a fair value hedge, which is based on the amortized cost of that asset, does not need to take into account fair value adjustments since inception of the hedge until those adjustments are amortized and adjust the EIR. This will be on the earlier of when (1) hedge accounting is terminated or (2) the holder of the loan chooses to start amortizing the fair value hedge adjustments.
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7.13.12 Impairments—write-off and default
The guidance in US GAAP and IFRS describing when to write off an asset is similar in principle, but the words are different. IFRS is more prescriptive on how an entity should define “default” compared to US GAAP. As a result, practices may differ, particularly in industries like banking, where the timing of asset write-off may be heavily influenced by regulators’ interpretations of the guidance.
US GAAP |
IFRS |
Reporting entities are required to write off financial assets (or a portion thereof) in the period in which a determination is made that the financial asset (or portion of it) is uncollectible. This generally occurs when all commercially reasonable means of recovering the loan balance have been exhausted.
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IFRS 9 requires an entity to reduce the gross carrying amount of a financial asset (in its entirety or a portion thereof) when the entity has no reasonable expectations of recovering it.
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US GAAP does not have an explicit definition of default.
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An entity would apply a definition of default consistent with the definition used for internal credit risk management purposes for the relevant financial instrument and can consider qualitative indicators (for example, financial covenants) when appropriate. However, there is a rebuttable presumption that default does not occur later than when a financial asset is 90 days past due, unless an entity has reasonable and supportable information to demonstrate that a more lagging default criterion is appropriate.
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7.13.13 Impairments—application to trade receivables and contract assets
Trade receivables and contract assets are in the scope of the impairment guidance under both frameworks. Even entities that are not financial institutions need to apply the requirements of the guidance and recognize “day 1” impairment losses on receivables under both frameworks. Operational simplifications under IFRS for trade receivables and contract assets could eliminate the major difference between the frameworks related to the IFRS three stage model, as described in SD 7.13.2.
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Full day 1 credit loss recognition is required by the general model for assets in scope, such as trade receivables and contract assets.
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Although in scope, the model includes some operational simplifications for trade receivables, contract assets, and lease receivables (see SD 7.13.15). These simplifications eliminate the need to calculate 12-month ECL and to assess when a significant increase in credit risk has occurred, as they allow (or in some cases require) measurement of the loss allowance at initial recognition and throughout the life of an instrument at an amount equal to lifetime ECL.
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7.13.14 Impairments—patterns of interest recognition
IFRS 9 specifies the amount to which the effective interest rate (EIR) is applied depending on the stage in the credit life of the asset. ASC 326 does not prescribe an EIR nor when an asset should be moved to non-accrual status, but it may permit existing non-accrual practices to continue.
US GAAP |
IFRS |
US GAAP does not preclude non-accrual status but does not prescribe when an entity should move an instrument to non-accrual status. Interest revenue is recognized based on the effective interest method. This is calculated by applying the effective interest rate to the gross carrying amount of a financial asset.
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Under IFRS, there is no non-accrual status. Interest revenue is recognized based on the effective interest method. This is calculated by applying the effective interest rate to the gross carrying amount of a financial asset, except for stage 3 financial assets. For stage 3 financial assets, the entity would apply the effective interest rate to the amortized cost of the financial asset (i.e., net of the allowance) in subsequent reporting periods.
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7.13.15 Impairments—lease receivables
A lessor’s net investment in a lease, whether a sales type/direct financing lease under US GAAP or finance lease under IFRS, is within the scope of the impairment guidance under both frameworks while operating lease receivables are not in the scope of ASC 326 for impairment but are in scope for IFRS 9.
US GAAP |
IFRS |
A lessor's net investment in a sales-type or direct financing lease is within the scope of the impairment guidance. When measuring the expected credit losses on the net investment in leases using a DCF method, the discount rate used in measuring the lease receivable under ASC 842, Leases, should be used.
ASC 842 does not provide explicit guidance on how to assess unguaranteed residual value (URV) for impairment. For purposes of applying ASC 326, the net investment in the lease should be evaluated as one unit of account. When measuring expected credit losses on net investment in a lease, a lessor would use cash flows it expects to derive from the underlying asset during the remaining lease term and cash flows it expects to derive from the underlying asset following the end of the lease term.
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A lessor’s net investment in a lease is within the scope of the impairment guidance. The cash flows and discount rate used for determining the ECL for lease receivables under IFRS 9 should be consistent with the cash flows used in measuring the lease receivable under IFRS 16, Leases.
An entity has an accounting policy choice when measuring ECL for finance lease receivables whether to apply the general model or measure the loss allowance at an amount equal to lifetime ECL at initial recognition and throughout the life of the lease receivable.
IFRS 9 does not provide explicit guidance on how to assess URV for impairment. We believe that the URV should be excluded from the calculation of the ECL and assessed for impairment under IFRS 16.
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7.13.16 Impairments—AFS debt securities measured at FVOCI
US GAAP has a trigger-based two-step test that considers the intent and ability to hold the AFS debt securities, as well as the expected recovery of the cash flows. Under IFRS, the general “expected loss” model applies. Generally, an allowance for the 12-month expected loss is recorded on initial recognition, and an allowance for lifetime expected losses is recognized upon a significant increase in credit risk.
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IFRS |
An investment in certain debt securities classified as available for sale is assessed for impairment if the fair value is less than amortized cost. When fair value is less than amortized cost, an entity needs to determine whether the shortfall in fair value is temporary or other than temporary and how much is credit-related.
In determining whether an impairment is other than temporary, the following factors are assessed for available-for-sale securities:
Step 1—Can management assert (1) it has the intent to sell and (2) it is more likely than not that it will have to sell before recovery of the amortized cost basis? If yes to either of these requirements, then impairment is triggered. If no, then move to Step 2.
Step 2—Determine how much of the decline in fair value below the amortized cost of the security is “credit-related.” An allowance for loan losses is only required for “credit-related” losses, and is limited to the difference between the fair value and amortized cost.
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As described in SD 7.13.2, IFRS 9 has a three-stage model for impairment based on the changes in credit quality of the instrument since inception. The same general impairment model applies to debt investments measured at FVOCI.
Upon initial recognition of a financial asset, an entity will typically record a 12-months ECL. Subsequently, the entity is required to continually assess whether a SICR has occurred. If such an increase occurs, the allowance is increased to an amount equal to lifetime ECL.
Movements in the ECL allowance are recognized in the income statement. However, the allowance itself is credited to a FVOCI reserve.
A practical expedient is available for assets with low credit risk. This expedient applies, for example, to investment grade assets. For such assets, an entity can choose to measure the impairment loss at the 12-months ECL and assume that no significant increase in credit risk has occurred, as long as the asset continues to be low credit risk.
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A policy election exists to use either a single best estimate or a probability-weighted methodology to measure the present value of cash flows expected to be collected.
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The measurement of ECL has to be a probability-weighted amount based on the expected cash flows under different scenarios.
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7.13.17 Impairments—Equity investments
Under US GAAP, for equity investments accounted for under the measurement alternative, an impairment assessment is required every reporting period. Under IFRS, there is no impairment requirement for investments in equity instruments (including those classified at FVOCI).
US GAAP |
IFRS |
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For equity investments without readily determinable fair values, for which the “measurement alternative” was elected, there is a single-step impairment model. An entity is required to perform a qualitative assessment at each reporting period to identify impairment. When a qualitative assessment indicates that an impairment exists, the entity will need to estimate the fair value of the investment and recognize in current earnings an impairment loss equal to the difference between the fair value and the carrying amount of the equity investment. The impairment charge is a basis adjustment, which reduces the carrying amount of the equity investment to its fair value; it is not a valuation allowance.
For equity investments with readily determinable fair values measured at FVTPL, all decreases in value are reflected in profit and loss, eliminating the need for an impairment assessment.
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There are no impairment requirements for investments in equity investments. For those equity investments measured at FVTPL, all decreases in value are reflected in profit and loss, eliminating the need for an impairment assessment. For those equity investments measured at FVOCI, all changes in fair value are recorded through OCI with no subsequent reclassification to profit or loss.
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7.13.18 Impairments—“purchased credit deteriorated” versus “purchased or originated credit impaired”
Both frameworks contain specific guidance for instruments that have already suffered credit deterioration since their origination at the time of purchase. While the concepts in the two frameworks are similar, there are differences in the definitions and in the accounting treatment. Purchase credit deteriorated (PCD) assets under US GAAP are limited to financial assets that are acquired. Under IFRS, an originated financial asset could follow the credit-impaired or purchased or originated credit impaired (POCI) model, although it is expected to be rare.
Under US GAAP, the cost basis of the asset is increased for the initial amount of the allowance. Under IFRS, no allowance is recorded on initial recognition of the asset. Under both models, subsequent credit improvements are recognized in the income statement as a reversal of credit loss and not as interest income. However, on the balance sheet, US GAAP would record such favorable changes in cash flows through reversal of the allowance, whereas under IFRS, favorable changes compared to initial expectations are recognized as a direct adjustment to the gross carrying amount of the asset.
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IFRS |
The definition of a PCD asset is an asset that has "experienced a more than insignificant deterioration in credit quality" since origination.
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The definition of a POCI asset is an asset for which, on initial recognition, "one or more events that have a detrimental impact on the estimated future cash flows of that financial asset," such as significant financial difficulty, default, and additional events, have occurred.
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For PCD assets, an investor will need to recognize an allowance for loan losses on initial recognition by estimating the expected credit losses of the purchased assets.
For financial assets that are considered PCD, an entity should not recognize the initial estimate of expected credit losses through current earnings. It would be recorded as an adjustment to the amortized cost basis of the related financial asset at acquisition (i.e., a balance-sheet gross-up). A similar gross-up should be recorded for AFS instruments that are deemed to be PCD assets. Specifically, both the recorded asset balance (i.e., the purchase price) and the allowance for loan losses should be increased by the amount of the expected credit losses at acquisition.
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For POCI financial assets, an entity only recognizes the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance. Impairment gains are recognized as a direct adjustment to the gross carrying amount, to the extent they exceed the loss allowance estimated at initial recognition and included in the estimated cash flows.
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Interest income for a PCD asset should be recognized by accreting the amortized cost basis of the instrument (which does not include the allowance) to its contractual cash flows. The accretable yield may be different for loan loss allowances estimated using a DCF model versus a non-discounted cash flow model.
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For POCI assets, entities are to use the credit-adjusted EIR, which is the rate that discounts estimated (rather than contractual) future cash payments and receipts through the expected life of the asset to its amortized cost (net of the allowance).
In some unusual circumstances, there might be evidence that the modified financial asset is credit-impaired at initial recognition, and thus should be recognized as an originated credit-impaired financial asset.
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