Repossessed collateral assets: classification and subsequent measurement

Repossessed collateral sits at the intersection of three different measurement bases (held-for-sale at fair value less costs to sell, inventory at lower of cost and NRV, or continued depreciation under IAS 16/40), and defaulting to 'held for sale' without a genuine active marketing plan both overstates the likelihood of a near-term sale and stops depreciation that may still be appropriate; conversely, continuing to depreciate an asset that genuinely meets held-for-sale criteria understates its carrying amount relative to what the standard requires.

Does the bank have a genuine, documented disposal plan for this repossessed asset, and does it meet all IFRS 5 held-for-sale criteria (immediate saleability, committed plan, active buyer search, reasonable price, sale highly probable within 12 months)? Does the bank routinely repossess and resell such assets as an ordinary trading activity, supporting IAS 2 inventory treatment instead of held-for-sale? If neither classification applies, is the asset being depreciated under the standard otherwise applicable to its nature (IAS 16 or IAS 40) rather than left unclassified? Has the classification been reassessed at this reporting date given how long the asset has been held and the status of any marketing effort?

1. At the point of repossession, first determine the bank's genuine, documented intended disposal path, not an aspirational one.
2. Test against the full IFRS 5 held-for-sale criteria: available for immediate sale in present condition, management committed to a plan, an active program to locate a buyer has begun, marketed at a reasonable price, and sale is highly probable within 12 months.
3. If all criteria are met, classify as held for sale and stop depreciation immediately.
4. If the bank routinely repossesses and resells such assets as an ordinary trading activity (rather than an incidental one-off), consider inventory classification under IAS 2 instead.
5. If neither held-for-sale nor inventory criteria are met (e.g., no realistic near-term buyer, asset being used by the bank), apply the standard otherwise relevant to the asset's nature (IAS 16 property/equipment or IAS 40 investment property) and continue normal depreciation.
6. Reassess the classification at each reporting date, a stalled sale process after several quarters is a strong indicator that held-for-sale criteria are no longer met.

Measure held-for-sale repossessed assets at the lower of carrying amount and fair value less costs to sell, with no further depreciation charged once classified; recognize any subsequent write-down (or a limited reversal, not exceeding the original carrying amount) as fair value less costs to sell changes. Measure inventory-classified repossessed assets at the lower of cost, typically the amount of debt settled plus direct acquisition/legal costs, and net realizable value, reassessing NRV at each reporting date. Where neither classification applies, continue depreciating under the applicable asset standard and test for impairment when indicators exist.

Disclose: (1) nature and carrying amount of repossessed assets by classification (held for sale, inventory, other); (2) the basis for the classification and key judgments (marketing status, expected disposal timeline); (3) impairment losses or write-downs recognized during the period; (4) the bank's policy on expected disposal timeline; (5) regulatory time limits, if any, that restrict the bank from holding foreclosed real estate long-term and the bank's compliance status.

• Classifying repossessed real estate as held for sale by default without an active, realistic marketing plan and a genuinely probable sale within 12 months
• continuing to depreciate an asset that genuinely meets held-for-sale criteria
• ignoring regulatory time limits that some jurisdictions impose on banks holding foreclosed real estate, which can create pressure inconsistent with the accounting classification
• measuring inventory-classified assets at the outstanding loan balance (which may exceed genuine cost or NRV) rather than at the lower of cost and net realizable value
• failing to reassess classification when a marketing plan stalls.