Accounting of Formation and Use of Reserves on Banks' Financial Assets: The Expected Losses Model

The aim of the article is a substantiation of methodological and practical principles of formation and use of reserves for operations with financial assets of banks. The subject of the study are financial assets of banks that are viewed for impairment. Methods of accounting of financial assets at amortized cost according to IFRS 9 are revealed. A procedure for calculation of reserves on financial assets is presented that is based on the evaluation of expected credit losses. It is determined that methods of calculation of expected credit losses depend on materiality of credit risk growth, which is evaluated during initial recognition of financial asset, and on each accounting date. According to the criteria of materiality of credit risk growth, two groups of expected credit losses are singled out: losses that are probable within 12 months form the report date and losses that are probable during the whole period of asset recognition in accounting. A review of methods of recognition and evaluation of expected credit losses and accrual of interest income on financial asset at the moment of initial recognition and on report date are performed. Through the numerical example, methods of calculation of amortized cost of financial asset is revealed on the following conditions: there are no signs of a significant increase in credit risk, there are signs of significant increase in credit risk, objective evidence of impairment has took place.