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Dear Mike,
I am confused when looking at the impairment of financial instruments.
As far as my understanding goes financial assets can be impaired following the 3 stage credit loss model. What about financial liabilities? What is the credit risk and why we recognise it through OCI (when the election at recognition has been made to classify them at fair value through OCI)?Also, it not very clear how to measure a derivative at recognition considering that no cash is paid/received? Derivatives can only be classified as FVTPL so I am not worried about impairement, am I right?
Thank you very much,
StefanoHi,
You’re correct with regards to the impairment of financial assets, but you need to rethink about impairing financial liabilities. I have a liability to the bank through my mortgage and I’d like to “impair” that but I doubt that it is going to be allowed to happen, so we do not impair financial liabilities.
On initial recognition of a derivative you will only recognise any amounts that you pay to enter into the derivative contract, and disclose the derivative in the notes. Again, don’t worry about impairment as with it being recognised as FVTPL there is no requirement to impair the derivative.
Thanks
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