ERM Glossary: Impairment loss and
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An impairment loss is a reduction
in value following an impairment review of an asset that determines that the
value of the asset is lower than its carrying value.
For impaired financial assets
measured at amortised cost, impairment losses are the difference between the
carrying value and the present value of estimated future cash flows, discounted
at the asset’s original effective interest rate. For impaired financial assets
measured at fair value the reference would be to the asset’s market value
before allowing for impairment.
Individually assessed loan
impairment provisions may be assessed for individually significant impaired
loans on a case-by-case basis, taking into account the financial condition of
the counterparty, any guarantor and the realisable value of any collateral
held. Loan impairment provisions may be collectively assessed where a portfolio
comprises homogenous assets each one of which is less significant in isolation and
where appropriate statistical techniques are available.
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