33.7 Impairment of financial assets and receivables

An assessment is performed at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired.

If there is objective evidence of impairment arising from loss events that occurred after the initial recognition of financial assets and causing a decrease in expected future cash flows then appropriate impairment losses are recognized against costs of the current period. Losses expected as a result of future events, no matter how likely, are not recognized.

Objective evidence of impairment includes information about the following loss events:

• significant financial difficulty of the issuer or obligor;
• a breach of contract, such as a default or delinquency in interest or principal payments;
• the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider (forbearance);
• it becoming probable that the borrower will enter liquidation, bankruptcy or other financial reorganization;
• the disappearance of an active market for that financial asset because of the issuer’s financial difficulties;
• observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including:
• adverse changes in the payment status of borrowers in the group (e.g. an increased number of delayed payments or
• adverse changes in the economic condition in a specific industry, region, etc. contributing to the deterioration of the debtors’ capacity for repayment;
• significant or prolonged decline in the fair value of investments in an equity instrument below the purchase cost (additional information is presented in section 33.7.2.1);
• adverse changes in the technology, market, economic, legal or other environment in which the issuer of an equity instrument operates indicating that costs of investment in that equity instrument may not be recovered.

The evidence of impairment for credit exposures may be divided into evidence relating to:

• the client, including:
• individual client – consumer bankruptcy, death, lack of information about the customer’s whereabouts, loss of employment, client’s financial problems;
• business client – receivership, bankruptcy/liquidation, significant deterioration of internal scoring/rating, significant deterioration of the economic and financial standing;
• both individual and business clients – significant delay in payment or unauthorized debit, client’s assets not being disclosed.
• account – launch of court proceedings, launch of enforcement proceedings, effective termination of the agreement, restructuring, exposure challenged by the debtor through litigation, identified fraud.

If there no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics, which are collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss has been recognized are not included in a collective assessment of impairment.

The amount of impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition). Interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Exposures for which evidence of impairment has been identified are divided into exposures measured individually and measured collectively in groups.

If evidence of impairment is identified for financial instruments available for sale then the losses previously recognized in the revaluation reserve are charged to profit or loss.

Impairment losses on financial instruments available for sale charged to profit or loss:

• in the case of equity instruments they cannot be reversed;
• in the case of debt instruments they can be reversed if, in a subsequent period, the fair value of the debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss.