Interest revenue recognition on credit-impaired (Stage 3) financial assets

Once a loan is credit-impaired, continuing to accrue interest on its full gross balance recognizes income the bank does not realistically expect to collect, overstating both interest income and the asset's carrying amount in the same direction, this is exactly the kind of error that inflates apparent profitability on the weakest part of the loan book, so the switch to a net (amortized cost) interest base is a critical, not cosmetic, control point.

Has the exposure been assessed as credit-impaired (Stage 3) based on objective evidence of default or significant financial difficulty, distinct from but linked to the SICR/staging analysis? Is interest income being calculated on amortized cost (gross carrying amount less loss allowance) using the original EIR, rather than on the gross carrying amount? Is any suspended or unrecognized contractual interest tracked separately for regulatory/memo purposes without leaking into the income statement? When the asset cures with sustained performance, does interest recognition revert to the gross carrying amount basis going forward?

1. Monitor each exposure for the point at which it becomes credit-impaired (Stage 3), based on objective evidence of default or significant financial difficulty, this is a distinct assessment from, but closely linked to, the SICR/staging analysis.
2. From that point forward, switch the interest recognition base from the gross carrying amount to amortized cost (gross carrying amount less the loss allowance), while continuing to apply the original effective interest rate (not a new or reduced rate).
3. Keep the ECL model and the interest calculation internally consistent, the same estimated recoverable cash flows should underpin both the loss allowance and the amortized cost used for interest accrual, avoiding double counting or omission of expected shortfalls.
4. Separately track any suspended or unrecognized contractual interest for regulatory or memo disclosure purposes, but do not let it leak into the income statement.
5. When the asset cures (objective evidence of impairment no longer exists, supported by sustained performance), revert the interest calculation to the gross carrying amount basis going forward.

Recompute the interest accrual each period as the effective interest rate multiplied by (gross carrying amount less loss allowance) rather than gross carrying amount alone; because the loss allowance itself changes each period as ECL estimates are updated, the net interest income figure will fluctuate with both the passage of time and changes in expected recoverability, which should be expected and explained rather than treated as an anomaly.

Disclose: (1) interest income recognized on credit-impaired financial assets, calculated on the net (amortized cost) basis, presented separately or clearly identifiable within total interest income; (2) a reconciliation to gross contractual interest where local regulatory reporting (e.g., suspended interest disclosures required by the regulator) differs from the IFRS 9 net presentation; (3) the accounting policy describing the switch from gross to net interest recognition upon becoming credit-impaired and the reversion policy upon cure; (4) the amount of suspended/unrecognized interest tracked for regulatory purposes, clearly labeled as not reflected in the IFRS income statement.

• Continuing to accrue interest on the gross carrying amount of Stage 3 loans without adjusting for the loss allowance, overstating both income and the carrying amount
• suspending interest entirely (a common regulatory practice) and treating that as equivalent to the IFRS 9 net interest method, when the two produce different numeric results and suspended interest is not the same as accruing on a net amortized cost base
• failing to switch back to a gross basis calculation once a loan cures and objective evidence of impairment no longer exists
• using a new or renegotiated rate instead of the original EIR when recalculating net interest.