Question
How should financial asset (e.g. loan portfolio) sales and write-offs be reported in the template F 02.00 (Statement of profit or loss)?
Background on the question
Some banks report loan portfolio sales and write-offs in F 02.00 on a gross basis. Consequently when impairment is linked to the loan (measured at amortised cost), banks report reversal of impairment in row 460. Examples: 1. Loan portfolio sale: o Gross carrying amount: 100 o Accumulated impairment: - 70 o Net carrying amount: 30 o Selling price: 35 Some banks report the transaction in the following way: o row 220 (Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss): 35-100 = - 65 OR row 350 (Other operating expenses) +100-35= 65 (loss) o row 460 (Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss): - 70 (impairment gain) 2. Write-off o Gross carrying amount: 100 o Accumulated impairment: - 90 o Amount written-off: 100 Some banks report write-offs in the following way: o row 220 (Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss): - 100 (loss) o Row 460 (Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss): - 90 (impairment gain) In our understanding IFRS doesn’t require the gross basis presentation (IFRS 9 3.2.12), thus sales and write-offs should be reported on a net basis in F 02.00. Therefore the decrease in the loss allowance due to the amounts written off or sold shouldn’t be reported in F 02.00 as a reversal of impairment.
Answer
According to IFRS 9.3.2.12, derecognition of financial assets should be recognized in profit and loss as the difference between the carrying amount (measured at the date of derecognition) and the consideration received. Consequently examples 1 and 2 should be reflected in the FINREP templates of Annex III to Regulation (EU) 680/2014 (ITS on Supervisory Reporting) as follows: Example 1 Journal Entry DR CR Accumulated impairment 70 Cash 35 Loans 100 Gains on derecognition or other relevant P&L posotion 5 Statement of financial position (F 01.01) 010 Cash, cash balances at central banks and other demand deposits 020 Cash on hand 35 Statement of profit and loss (F 02.00) The effect of the loan portfolio sale is recorded in the P&L on a net basis (5 CU). In the example n. 2 the treatment related to a write-off is the following: Example 2 Journal Entry DR CR Accumulated impairment (from previous periods)* 90 Write-off (directly through P&L) 10 Loans 100 * Use of allowances for write-offs Statement of profit and loss (F 02.00) Given that the accumulated impairment of 90 was recognised in previous accounting years, the P&L for the current accounting year includes the following entry: 460 (Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss) 10 491 (Financial assets at amortised cost) 10