In: Accounting
Task 2 – Discuss the following concept in detail and find out the value of Expected Loss using appropriate model. (3+4 = 7 Marks)
(3marks)
Loan taken amount 30 millions and paid 8 millions amount without interest in 2020 ee company suffering losses and probability of the default is 0.85 off the balance amount so company pledge his property which has OMR 7.5 millions
Loan. amount 30 millions. Amount repaid. . 8 millions. Balance amount 22 millions probability of default 0.85 then amount of default is 18.7 million and company pledge his property 7.5 millions balance amount is 11.2 million which is probability of default and interest amount is the exposure of the default with the 0.15 which is 3.3 millions.
3 bucket approach of asset classification as per the ifrs ifrs 9 as below
Approach fast when a loan is organised added or purchased expected credit loss resulting from default events that are possible within the next 12 months are recognised and loss allowance is established on subsequent reporting date 12 month expected credit loss also applies to existing lawn with no significant increase in credit risk since their initial recognition interest revenue is calculated on the loans gross carrying amount without deduction of expected credit loss. in determining whether a significant increases in the credit risk has occurred since initial recognition if bank is to accept the changes if any in the risk of default over the expected life of the loan.
Second approach if a loans credit risk has increased significantly since initial recognition and is not considered low lifetime expected credit loss are recognised the calculation of interest revenue is the same as for approach fast
Third approach if the loans credit risk increases to the point where it is considered credit impaired interest revenue is calculated based on the lawns amortized cost that is is the gross carrying amount less the loss allowances. Lifetime expected credit loss are recognised as in the approach second