Purchased or originated credit-impaired (POCI) financial assets

POCI accounting is a completely different track from the normal 3-stage ECL model, and failing to spot that an asset was credit-impaired at acquisition means applying the wrong day-1 measurement (a 12-month allowance gross-up that should not exist) and the wrong subsequent interest income base (contractual rate instead of a credit-adjusted EIR that already prices in expected losses); this distorts both the initial balance sheet and every period's income statement afterward for that asset's life.

Was the asset credit-impaired at the point of purchase or origination based on objective evidence (significant financial difficulty, default, deep discount for incurred losses), distinguishing this from a discount driven purely by an interest rate mismatch? Has a credit-adjusted EIR been calculated that incorporates expected credit losses into the initial cash flow estimates, and is interest income accrued on amortized cost using that rate rather than the contractual rate? Is the loss allowance tracked as the cumulative change in lifetime ECL since initial recognition, rather than reset to a 12-month or Stage 2 basis even after improved performance?

1. At acquisition or origination, assess whether the asset is credit-impaired based on the same objective evidence indicators used elsewhere in IFRS 9 (significant financial difficulty, default, a concession due to distress, or a deep discount reflecting incurred credit losses), distinguish this from a discount driven purely by an interest rate mismatch, which is not POCI.
2. If credit-impaired at initial recognition, classify the asset as POCI and recognize it at its fair value (typically the discounted purchase price or origination amount), with no separate day-1 ECL allowance gross-up since expected losses are already embedded in that price.
3. Calculate a credit-adjusted effective interest rate that incorporates the initial expected credit losses into the estimated cash flows used to derive the rate.
4. In subsequent periods, do not apply the general 3-stage model; instead track only the cumulative change in lifetime expected credit losses since initial recognition, recognizing favorable or unfavorable changes as an impairment gain or loss.
5. Continue applying the same credit-adjusted EIR (not the contractual rate) to the amortized cost throughout the asset's life, even if it later shows sustained improved performance, POCI assets never move to a different stage or revert to a standard EIR.

Compute interest revenue by applying the credit-adjusted EIR to the amortized cost of the asset (not to the gross carrying amount), since expected losses are already embedded in the cash flow projections used to derive that rate at acquisition. Reassess lifetime expected credit losses each reporting period and adjust the loss allowance for any change since initial recognition, this can produce an impairment gain (income) if actual or expected recoveries exceed the original expectation, which is a distinctive and often counter-intuitive feature of POCI accounting compared to the general model.

Disclose: (1) POCI assets separately from other credit-impaired exposures, including their gross carrying amount and amortized cost; (2) the cumulative change in lifetime expected credit losses recognized since initial recognition; (3) the credit-adjusted EIR methodology and its effect on interest income compared to what a contractual or standard effective rate would have produced; (4) the volume and nature of POCI acquisitions or originations during the period; (5) key assumptions used in estimating lifetime cash flows at acquisition.

• Applying the general 3-stage ECL model and a 12-month loss allowance to a POCI asset instead of the lifetime-only cumulative-change approach, effectively double-counting a loss already priced into the acquisition
• using the contractual interest rate rather than a credit-adjusted EIR to accrue interest, overstating income
• failing to identify that a steeply discounted loan portfolio acquisition was credit-impaired at acquisition (mistaking it for a simple below-market-rate purchase)
• moving a POCI asset to a different '
• stage'
• as if it were a standard exposure, which is not how POCI accounting works
• not re-estimating lifetime cash flows periodically, missing genuine improvements or further deterioration.