Credit-Impaired Financial Asset

From Open Risk Manual

Definition

A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred.

Informally credit-impaired assets are also denoted Stage 3 Assets

Evidence of Impairment

Evidence that a financial asset is credit-impaired include observable data about the following events[1]:

  • Significant Financial Difficulty of the issuer or the borrower
  • A Breach of Contract, such as a default or Past Due event
  • The lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider
  • It is becoming probable that the borrower will enter Bankruptcy or other financial reorganisation
  • The disappearance of an active market for that financial asset because of financial difficulties
  • The purchase or origination of a financial asset at a deep discount that reflects the incurred Credit Loss

It may not be possible to identify a single discrete event—instead, the combined effect of several events may have caused financial assets to become credit-impaired.

References

  1. IFRS Standard 9, Financial Instruments

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