The fair value of a loan portfolio acquired/originated by a Bank differs from its contractual value. This difference (fair value adjustment on initial recognition (the “adjustment”)) has to be recognised in accordance with IFRS 3. In such case and since there is no separate column for this component, shall we reflect this adjustment in Template 4.4 row 170 ‘Loans and advances’ - under gross carrying amount (c010-c020) or under stock of provision (c030-c050)? We note that the issue of reporting this adjustment also arises on several templates which have no separate column for this component, namely F6, F7, F12, F20.4, F20.7, F18 and F19.
Fair value adjustment on initial recognition has been recognised for an acquired loan portfolio by the Bank. In accordance with the provisions of IFRS 3 and IAS 39, this adjustment decreases the gross carrying value of loans and advances to customers. 1. IFRS 3.B41 provides specific guidance for business combinations: the purchaser in a business combination does not recognize a separate valuation allowance as of the acquisition date for assets acquired in a business combination that are measured at their acquisition date fair values; this is because the uncertainty about future cash flows is included in the fair value measurement. This paragraph is also applicable in IFRS 9. 2. As per IAS 39.59 it is not appropriate to set up an impairment allowance account on the initial recognition of a loan or a portfolio. Impairment is recognized only if there is objective evidence of impairment as a result of events that occur after the initial recognition of the assets. However, the Bank for IFRS 7 disclosure purposes as well as for credit risk monitoring, the aforementioned adjustment is disclosed separately in both ways ie discloses gross carrying value before and after deduction of fair value adjustment. For Fin Rep purposes and since the current templates have no separate column to disclose the adjustment, the Bank follows the net approach (the adjustment is netted off with the gross carrying value of loans and advances to customers), which is consistent with the consolidated financial statement of the Bank.
According to Annex V, Part. 1.34 (b) of the ITS on Supervisory Reporting, under IFRS for debt instruments at amortised cost or at fair value through other comprehensive income, the gross carrying amount shall be the carrying amount before adjusting for any loss allowance.
Moreover, loans acquired in a business combination are initially recognised at their acquisition-date fair value according to IFRS 3.18.
As the acquisition-date fair value is the carrying amount before adjusting for any loss allowance, the acquisition-date fair value meets the definition of the gross carrying amount of loans acquired in a business combination.
Thus, the gross carrying amount includes the fair value adjustment on initial recognition of the acquired loans.