Credit-Impaired Financial Asset

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 includes observable data about the following events:

• 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, have 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

Issues and Challenges

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.

See Also

• NPL Glossary

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