Impairment of financial assets
The LGUs assess at each reporting date whether there is objective evidence that a
financial asset or a group of financial assets is impaired. A financial asset or a
group of financial assets is deemed to be impaired if, there is objective evidence
of impairment as a result of one or more events that has occurred after the initial
recognition of the asset (an incurred ‘loss event’) and that loss event has an
impact on the estimated future cash flows of the financial asset or the group of
financial assets that can be reliably estimated. Evidence of impairment may
include the following indicators:
(a) The debtors or a group of debtors are experiencing significant financial
difficulty;
(b) Default or delinquency in interest or principal payments;
(c) The probability that debtors will enter bankruptcy or other financial
reorganization; and
(d) Observable data indicates a measurable decrease in estimated future cash
flows (e.g. changes in arrears or economic conditions that correlate with
defaults)
Financial assets carried at amortized cost
For financial assets carried at amortized cost, the LGUs first assess whether
objective evidence of impairment exists individually for financial assets that are
individually significant, or collectively for financial assets that are not
individually significant. If the LGUs determine that no objective evidence of
impairment exists for an individually assessed financial asset, whether significant
or not, it includes the asset in a group of financial assets with similar credit risk
characteristics and collectively assesses them for impairment. Assets that are
individually assessed for impairment and for which an impairment loss is, or
continues to be, recognized are not included in a collective assessment of
impairment.
If there is objective evidence that an impairment loss has been incurred, the
amount of the loss is measured as the difference between the assets carrying
amount and the present value of estimated future cash flows (excluding future
expected credit losses that have not yet been incurred). The present value of the
estimated future cash flows is discounted at the financial asset’s original effective
interest rate. If a loan has a variable interest rate, the discount rate for measuring
any impairment loss is the current effective interest rate.
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