Should the amounts mentioned in Article 473a(2)(b) of Regulation (EU) No 575/2013 (CRR), as modified by Regulation (EU) No2017/2395 be:
or the total IFRS 9 Expected Credit Loss at transition date - point (i) and the adjusted amount of IAS 39 impairment losses at the day before transition date – point (ii) – see details below, in case where the reporting of the credit-impaired financial assets’ gross carrying amount is modified (IFRS 9 vs IAS 39).
Article 473a of Regulation (EU) No 575/2013 (CRR) was introduced by Article 1 of Regulation (EU) 2017/2395 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 as regards transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds and for the large exposures treatment of certain public sector exposures denominated in the domestic currency of any Member State
There are two options for the reporting of the credit-impaired financial assets’ gross carrying amount:
Option 1) The gross carrying amount of a credit-impaired assets should be the principal amount together with the value of the interest income computed in accordance with IFRS 9 5.4.1(b).
Option 2) The gross carrying amount of a credit-impaired asset should be the amount of the contractual cash flows of the financial assets discounted at the original effective interest rate (the principal amount together with the value of the contractual interest).
Simultaneously, this situation affects, on the transition day, the value of the accumulated stock of IFRS 9 impairment that has to be reported, by including (Option 2) or not including (Option 1) the stock (on 31 December 2017) of the adjustment of the contractual interest (the difference between the contractual interest and the interest income computed in accordance with IAS 39.AG93)), as a reclassification from the gross value of credit-impaired assets, on the transition date.
The sum of this reclassification could be material, in case of the most important credit institutions.
In this context, it is very important to know which approach will ensure the proper application of the provisions of the Regulation EU 2017/2395.
The provisions in Article 473a of Regulation (EU) No 575/2013 (CRR) are based on the calculation of provisions according to IFRS 9 or IAS 39 and a determination of relevant provisions needs therefore to be made in accordance to the accounting framework. It should be noted that, according to the accounting framework, amortised cost should be calculated using the effective interest rate determined at recognition (or an approximation thereof).