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Hi
Great and generous job being done by the opentuition team.
I was reading through the article on impairment of financial assets on ACCA website and I felt someting was not correct in the example given, else please correct my understanding.
It said that a loan of 50k was due from a customer now with coupon and effective interest of 10% pa maturing after 2 years. Some events now indicate that the loan will not be recovered and the interest that will be received is expected to be 6% and not 10%.
My question, (1) why calculate the present value of future interest and impair now? The interest that has not been recorded yet?. (2) Why not record impair the 50k loan itself?
Please correct my understanding
Best of luck to all!
Regards
This is a new method of impairment called the expected loss model. It calculates impairment of financial assets sooner so the accounts are more prudent.
This model uses the present value of the difference between the two interest rates. So you’d use 4% as your basis for impairment.
So gutted this never came up in the exam.
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