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on the june 2011 paper question 4 (b) (ii) the incurred loss model..how to get 4550 on the loan asset?
and is 522 an impairment loss??im confused here..im so weak in my financial instruments help please!!
for financial assets measured at amortised cost.impairment loss is the difference between the asset’s carrying amount and its recoverable amount which is the present value of estimated future cashflow discounted at the financial instrument’s original effective interest rate right?then what is the incurred lost model and expected loss model for??there are so many ways of calculating impairment..can someone please clarify and make it clear for me???thanks!!
and in the question june 2011 grainger …expected loss model..how to calculate impairment loss if we were asked??why does the answer calculate impairment loss for incurred loss and did not calculate so for expected loss model????
4550 is the carrying value of the loan where the anticipated default of 9% is not recognised until the default actually happens. Yes, we can charge 16% but when default does occur as anticipated, the rate of return in the year of default is dramatically reduced (down to 5.5%) when compared with the previous 2 years when no default is anticipated.
In the expected loss model, if we account for our pessimism with effect from year 1, the anticipated rate of return of 9.07% is applied immediately and, even though we receive full interest in years 1 and 2, when the default occurs, the expected income from loan interest is compared with the (reduced) carrying value of the loan (4,275.6) giving rise to a more realistic comparable (smoother) return on our investment
OK?
I believe that both your other posts are answered in part (a) of the answer from question 4 from June 2011.
As to your fifth post, I hope you managed to get some sleep last evening 🙂
so in the incurred loss model..the impairment loss of 522 is recognised when impairment happen. thats why it is recognised in year 3.whereas for the expected loss model,expected impairment is recognised earlier in year one…that is why in incurred loss model,there is no profit smoothing as there will be a sudden drop in return from 16% to 5.56 % correct?
Correct. And that then leads on to the debate about whether profit smoothing / manipulation is an acceptable activity. By estimating / anticipating defaults some time in the future, the expected loss model could be used to reduce the return in the early years, even in the event that there is no default in later years.
OK?
Hi Mike,
I dig this out coz I can’t understand working for Q (ii) why there is cash outflow. I guess the portfolio loans are Grainger’s debt assets. 16% used to calculate interest AR. Why under both incurred cost and expected loss models there are also negative cash flows?
Thanks,
Qin
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