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Sir when is a financial asset said to be credit impaired? When the credit risk is low or high? Or either way it is impaired. Because apparently my study text seem to be alluding that when an asset’s credit risk is low, a loss allowance will be created but effective interest will still be calculated on gross carrying amount. Which is strange. I thought the moment there is a loss allowance needed we will Dr. SPL and Cr. Financial asset , and so effective interest would have been on net carrying amount of the asset.
1. Credit risk low = small loss allowance
2. Credit risk high = big loss allowance
Double entry (think back to your financial accounting / F3:
Dr P&L Cr Allowance for doubtful debts NOT Cr Receivable
We only credit receivable when debt is definitely bad (now known as Stage 3 of impairment loss model).