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Impairment of financial assets – Interest cost on credit allowance (Stage 1)

Forums › ACCA Forums › ACCA SBR Strategic Business Reporting Forums › Impairment of financial assets – Interest cost on credit allowance (Stage 1)

  • This topic has 1 reply, 1 voice, and was last updated 6 years ago by Yaquta.
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  • November 28, 2018 at 4:37 am #486209
    Yaquta
    Member
    • Topics: 3
    • Replies: 2
    • ☆

    Hi I want to understand something on the three stage approach. Please see qn below:

    The question is:

    On 31/5/20X5 X made a loan of $100m to a customer. Interest payable on the loan was 4.5%p.a.

    Initial present value of lifetime expected credit losses with a discount factor of 4% is 25 million
    Probability of default over next 12 months was 10%

    Show calculations for loan treatment.

    Answer:
    Stage 1 – recognition of the 12 month allowance which will be (25m*0.1) = 2.5 (Taken to P&L)

    Therefore carrying amount in the SFP will be (100-2.5) = 97.5m

    Interest revenue = 100*4.5% = 4.5m (Taken to p&L)

    Now here is my qn – Will Interest cost on credit allowance be 2.5m*4% or 4.5% (Please assist here, do we use the effective interest rate or do we use the discount factor rate to compute the interest cost) .

    BPP has 2 similar examples and in both examples different rates were used (i.e discount factor was used in one example and effective interest in the other example)

    Your help shall be appreciated

    Thanks

    November 30, 2018 at 3:57 pm #486592
    Yaquta
    Member
    • Topics: 3
    • Replies: 2
    • ☆

    please someone reply

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