How to approach it
- Initial cost = fair value + transaction costs.
- Each year: interest at EIR on the gross carrying amount (stage 1 and 2), coupon received, then adjust the loss allowance to the required closing figure.
- Stage 2 means lifetime ECL even though the asset is not credit-impaired.
Key rules to apply
- IFRS 9: 12-month ECL while credit risk has not increased significantly; lifetime ECL once it has.
- Interest is on the gross amount until the asset is credit-impaired (stage 3), then on the net amount.
- Only the change in the allowance hits P&L each year.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Keeping 12-month ECL until the asset is credit-impaired (examiners' point).
- Expensing the whole closing allowance rather than the increase.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q3 without copying it.
Original practice question
Amortised cost with stage 2 ECL
On 1 January 2024 a company bought a 5-year bond (face Rs 100m, 7% annual coupon) for Rs 95.007m plus Rs 1.0m costs; EIR 8%. ECL: 31 December 2024 12-month Rs 0.8m; 31 December 2025 significant increase in credit risk, lifetime Rs 3.0m.
Required: Give the 2024 and 2025 journal entries.
Worked solution
| Entry | Dr | Cr | Rs m |
|---|---|---|---|
| 1 Jan 2024 purchase | Investment | Cash | 96.007 |
| 2024 interest: 96.007 × 8% | Investment | Interest income | 7.681 |
| 2024 coupon | Cash | Investment | 7.000 |
| 2024 ECL | Impairment loss | Loss allowance | 0.800 |
| 2025 interest: 96.688 × 8% | Investment | Interest income | 7.735 |
| 2025 coupon | Cash | Investment | 7.000 |
| 2025 ECL: 3.0 − 0.8 | Impairment loss | Loss allowance | 2.200 |
Answer: Net carrying amount at 31 December 2025 = 97.423 − 3.0 = Rs 94.423m.