Write-off and derecognition of uncollectible loans

Write-off and sale-based derecognition look similar (the loan disappears from the balance sheet) but mean very different things: a write-off is an accounting acknowledgment that recovery is not realistically expected on an asset the bank still legally owns and may still pursue, while derecognition on sale means the risks and rewards have actually left the bank; conflating the two, or delaying a write-off that ECL already anticipates, misstates both the gross loan book and the real economic exposure retained.

Is there objective evidence the bank has no reasonable expectation of recovering the loan in full or part (prolonged default, bankruptcy, exhausted recovery efforts), justifying write-off of the gross carrying amount and matching loss allowance? Where a loan has instead been sold or transferred, has the bank assessed whether it transferred substantially all risks and rewards, retained them, or transferred neither? Is the write-off being applied under a documented, consistently applied policy rather than case-by-case discretion, and are subsequent recoveries recognized in profit or loss in the period received (commonly credited to the impairment loss line) rather than by reinstating the written-off loan?

1. Assess whether there is objective evidence the bank has no reasonable expectation of recovering the contractual cash flows in full or in part (for example prolonged default, borrower bankruptcy, exhausted internal and external recovery/enforcement efforts).
2. If so, write off the gross carrying amount (and the associated loss allowance) to the extent no longer expected to be recovered, even if legal enforcement activity continues in parallel.
3. Separately assess whether a loan has instead been sold or transferred: determine whether the bank has transferred substantially all risks and rewards (supporting derecognition), retained substantially all of them (precluding derecognition), or transferred neither (requiring a further control-based assessment).
4. For a qualifying sale/transfer, derecognize the loan and recognize any gain or loss as the difference between the carrying amount and consideration received (plus/minus any retained interest).
5. Apply a documented, consistently applied write-off policy (e.g., after a defined period of default combined with exhausted recovery efforts) rather than case-by-case discretion.
6. Recognize any subsequent recovery on a previously written-off asset in profit or loss in the period received, commonly credited to the impairment loss line (or a separately presented recoveries line, per a consistent policy), not by reinstating the gross loan and loss allowance.

Measure the write-off as the full or partial gross carrying amount no longer expected to be recovered, reducing both the gross loan and the loss allowance by the same amount so there is no further P&L effect at the point of write-off itself (the loss was already recognized through the ECL allowance). For a sale or transfer, measure any gain or loss as the difference between the derecognized carrying amount and the consideration received, adjusted for any asset or liability retained for continuing involvement.

Disclose: (1) the amount of financial assets written off during the period that are still subject to enforcement activity; (2) the write-off policy applied, including the typical triggers and timeframes; (3) the gain or loss recognized on derecognition of loans sold or transferred, and whether continuing involvement was retained; (4) recoveries of previously written-off amounts recognized in profit or loss during the period; (5) a reconciliation showing write-offs as a component of the movement in the ECL loss allowance by stage.

• Delaying write-off of clearly uncollectible loans to avoid the optical effect of a large write-off, even though the loss is already substantively reflected in the ECL allowance and the write-off itself has no further P&
• L impact
• treating a loan sale with significant retained recourse, credit risk, or a subordinated retained interest as full derecognition without properly assessing risks and rewards
• reversing a write-off (reinstating the gross asset and allowance) instead of recognizing the recovery in profit or loss (typically as a credit to the impairment line) when cash is unexpectedly collected
• applying an inconsistent write-off policy across similar portfolios, creating incomparable coverage ratios.