What IFRS 9 requires
Under IFRS 9 Financial Instruments, the impairment model measures expected credit losses on the gross carrying amount of a financial asset—that is, the present value of contractual cash flows outstanding, including accrued but unpaid interest. The International Accounting Standards Board IFRS Foundation explains that expected credit loss is the difference between contractual cash flows and those the entity expects to collect, discounted at the effective interest rate. This means accrued interest that is contractually due is part of the cash flows against which credit risk is assessed, and if that interest is not expected to be collected it is included in the loss allowance. Deloitte LLP commentary on IFRS 9 reinforces that for assets that are not credit-impaired, interest revenue continues to be recognized on the gross carrying amount, while the allowance reflects expected shortfalls on those contractual flows.
Treatment for credit-impaired and purchased assets
For credit-impaired assets and Purchased or Originated Credit-Impaired assets POCI, IFRS 9 treats interest revenue differently. The standard requires interest to be recognized using the effective interest rate on the asset’s net carrying amount after the loss allowance, which reflects that the entity already expects some or all contractual interest will not be collected. The IASB IFRS Foundation guidance clarifies that POCI assets require recognition of lifetime expected credit losses at initial recognition and subsequent interest income calculated on the credit-adjusted carrying amount, so accrued interest expected to be uncollectible has already been absorbed by the initial allowance.
Relevance, causes, and consequences
Recognition of accrued interest within loan-loss provisioning is important for transparent measurement of credit risk and earnings. Causes for non-collection include borrower distress, economic downturns, or territorial legal frameworks that limit enforcement. In jurisdictions with high non-performing loan rates, accrual of interest may be particularly sensitive to provisioning policy and regulatory guidance. Consequences include impacts on reported interest income, profit volatility, and regulatory capital ratios for banks. Practitioners often consult the IASB IFRS Foundation standard text and Big Four guidance such as Deloitte LLP for implementation details and examples to ensure consistent application across cultural and regulatory environments.