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ERM Glossary: Impairment loss and impairment provisions

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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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