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?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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