How should we define gross carrying amount of purchased credit-impaired assets (POCI) for reporting into FINREP templates (i. e. F 18.00 and F 19.00)? Related to gross carrying amount in previous question, how should we in define original exposures for reporting into COREP and LE templates? How should we calculate coverage ratio by allowances or provisioning for credit losses, if the value of allowances for expected credit losses related to the POCI is positive? For example: In Q1 2018 bank A simultaneously with other forbearance measures in respected existing exposures to the debtor who is already in default, grants him a new loan in CU 100.000 (=so-called transaction price). There is evidence that the loan is already credit-impaired at initial recognition, based on that fact bank identified this exposure as an originated credit-impaired financial asset in stage 3 (=POCI).The fair value of the loan at the time of drawdown (i.e. at initial recognition) is only CU 55.000, mainly due to the significant credit risk value adjustment. Therefore, bank at initial recognition in accordance with paragraph B5.1.2A (b) of IFRS 9 recognises one-day profit or loss (P&L) in CU 45.000. Bank recognises also allowance for expected credit losses (ECL) in CU 1.000. In Q4 2018 bank find out that estimated allowance for ECL in CU 1.000 and negative fair value adjustment due to credit risk in CU 45.000, which was, taking in to account one-day P&L and calculation of credit-adjusted effective interest rate under paragraph 5.4.1 (a) of IFRS 9, too pessimistic. Therefore, bank reverses allowances from the previous period in CU 1.000. In addition, bank recognises positive amount of allowances for ECL in CU 2.000. The same situation could happened if Bank A modified financial assets, which in accordance with paragraph B5.5.25 of IFRS 9 would result in the derecognition of the existing financial asset and the subsequent recognition of the new modified financial asset. If there is evidence that the new modified financial asset is credit-impaired at initial recognition, it should be in accordance with paragraph B5.5.26 of IFRS 9 recognised as an originated credit-impaired financial asset (=POCI). Based on presented example, which option to calculate the gross carrying amount under paragraph 34 (b) of Part 2 Annex V of Regulation (EU) No 680/2014 for reporting purposes in the FINREP templates is correct: Option A: Fair value of financial asset defined at initial recognition in accordance with paragraphs 5.1.1, 5.1.1A and B5.1.2A of IFRS 9, as the starting point for using amortized cost method at subsequent measurement, because FINREP templates in general follow IFRS. According end of the Q1 and Q4 gross carrying amount is CU 55.000 (= transaction price in CU 100.000 minus recognised one day P&L in CU 45.000). Option B: Fair value of financial asset after adding back any negative fair value adjustment due to credit risk at initial recognition of financial asset, as starting point for credit losses calculation both for accounting and for capital adequacy purposes. According end of the Q1 and Q4 gross carrying amount is CU 100.000 (= transaction price). In this case negative fair value adjustment due to credit risk at initial recognition in CU 45.000 should increase amount of allowances for ECL. How should we, in respect of gross carrying amount in the example, define original exposures for the purpose of including in COREP and LE templates, in accordance with option A or option B?
Paragraph 34 (b) in Annex V states: "Under IFRS for debt instruments at amortised cost or at fair value through other comprehensive income, the gross carrying amount shall be the carrying amount before adjusting for any loss allowance." In our understanding aforementioned definition of gross carrying amount of debt instrument at amortised cost already includes also fair value adjustment due to credit risk at initial recognition (i.e. one day P&L), that could at later stage (i.e. at subsequent measurement) lead to creation of positive amount of allowances for ECL. This deserves a careful consideration in terms of the correct calculation of business indicators such as NPE and NPL ratio, coverage ratio by allowances or provisioning for credit losses. It is also not clear how (if at all) to take into account such definition of gross carrying amount for the purpose of calculation of ECL from the accounting point of view and for the purpose of calculation of capital adequacy. We believe that all adjustments due to credit risk since initial recognition of financial assets that already reflected in P&L should be taken in to account as value adjustment (and not as reduction of original exposures). This should be taken into account also for modified financial assets, in total amount of adjustment that reflected in P&L as modification gains or losses.
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