For debt instruments that are measured at FVOCI under IFRS 9:
1. Do ECL impairments qualify as specific credit risk adjustments?
2. Is the original exposure pre-conversion for the FVOCI debt instrument equal to the carrying value?

For debt instruments that are measured at FVOCI under IFRS 9, the ECL impairments do not reduce the carrying amount in the balance sheet, which remains at fair value. Instead, an impairment loss in profit or loss is recognised against OCI as accumulated impairment amount, with no impact on the total equity (as the impairment loss is recognized in profit or loss and OCI increases for the same amount) and, consequently, no impact on the CET1 capital.

Therefore it is unclear whether these ECL impairments qualify as specific credit risk adjustments, and how the original exposure pre-conversion for the FVOCI debt instrument is to be calculated.

For example:
N: debt instrument is purchased at 100 and measured at FVOCI
N+1: fair value decreases to 95
N+2: fair value remains 95 and ECL impairment of 3 is recognized

Accounting entries N:
Dt FVOCI debt instrument (asset) 100
Ct Cash -100

Accounting entries N+1:
Dt OCI (equity) 5
Ct FVOCI debt instrument (asset) -5

Accounting entries N+2:
Dt ECL impairment loss (profit or loss) 3
Ct OCI (equity) -3

=> At N+2, the carrying amount of the asset is 95, the recorded ECL impairment decreases profit or loss with 3, and OCI had been increased with 3, hence there is no impact on CET-1 capital.

The following options are possible:
1. original exposure pre-conversion factors = 95 (=carrying amount)
specific credit risk adjustment = 0
=> exposure net of value adjustments = 95
2. original exposure pre-conversion factors = 95 (=carrying amount)
specific credit risk adjustment = -3
=> exposure net of value adjustments = 92
3. original exposure pre-conversion factors = 98 (=carrying amount + ECL impairment)
specific credit risk adjustment = -3
=> exposure net of value adjustments = 95

This question has been rejected because the issue it raises is beyond the remit of the Q&A process and as such it cannot be addressed via a Q&A. 

The Single Rule Book Q&A tool has been established to provide explanations and non-binding interpretations on questions relating to the practical application or implementation of the provisions of legislative acts referred to in Article 1(2) of the EBA’s founding Regulation, as well as associated delegated and implementing acts, and guidelines and recommendations, adopted under these legislative acts. The Q&A process cannot, for example, consider issues which would require changes to the regulatory framework.

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