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Dear sir,
In note of opentuition about illustration 1- recognition of Stage 1 credit losses,
At the end of first year : increase in loss allowance = 12 month expected credit loss + finance cost.
But in illustration in BPP :
Question:
A company has a portfolio of loan assets. All loan assets have an effective interest rate 7.5%. The portfolio was initially recognised at $840,000 on 1Jan20X1 with a separate allowance of $5,000 for 12-month expected credit losses (lifetime expected credit losses of $100,000 at present value × 5% chance of default within 12 months). A discount factor of 7.5% has been applied in calculating the loss allowance. No repayments are due in the first year.At 31Dec20X1, credit risk of loan asset has increase significantly. The expectation of lifetime expected credit losses remains the same.
Answer:
At 31.1.20X1 5000
Unwind discount 375 (5,000*7.5%)
Increase in allowance 101,125 (balancing)
At 31.12.20X1 107,500 (100,000*1.075)Increase in allowance as illustration of opentuition = 12 month expected credit loss + finance cost, therefore = 5000 + 375 but in BPP answer = balancing of 107,500 – 5000 – 375. I don’t understand this answer. Please kindly help me.
Thank you so much.
The example may be over-complicating the issue. You will be told the opening and closing allowance.
The difference goes to P&L. – some of the difference is unwinding of the discount
Opening allowance PLUS finance cost PLUS balancing figure EQUALS closing allowance.
Dear sir,
But why in note of opentuition don’t calculate closing allowance, then balancing figure, sir ? Thanks sir.In the first OT illustration there is NO CHANGE in the allowance in the first apart from the unwinding of the discount.
In the second illustration (Stage 2) there will be a P&L charge. This will be the difference between the opening 4,200 and closing 200,000 allowance and will comprise unwinding of the discount plus increase which you describe as balancing figure. (Don’t call it that in the exam!)
4,200 + (5%x4,200) + x = 200,000
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