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    Question

    BankCo holds debt securities: • Portfolio A:

    Government bonds held to collect contractual interest/principal. • Portfolio B: Corporate bonds held to collect and occasionally sell to manage liquidity. • Portfolio C: Equity investments in FinTech start-up for strategic relationship. BankCo assesses Portfolio B (corporate bonds FVTOCI). Market credit spreads widened, PDs increased, though no actual default. Management wants to keep 12-month ECL citing “no actual loss.” Which treatment is correct?
    A Continue with 12-month ECL since no default. Correct Answer Incorrect Answer
    B Move to lifetime ECL (Stage 2) as credit risk increased significantly, even without default. Correct Answer Incorrect Answer
    C No impairment required because FVTOCI. Correct Answer Incorrect Answer
    D Provide impairment only when selling bond. Correct Answer Incorrect Answer
    E Recognise provision through OCI not P&L. Correct Answer Incorrect Answer

    Solution

    SICR (significant increase in credit risk) requires lifetime ECL even without default. For FVTOCI debt, impairment allowance goes to P&L with offsetting entry in OCI.

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