RSM Indonesia


Change of the Impairment Model in Accounting Standards


The new Accounting Standards now introduce a different impairment model. Under the new standard the impairment model used is the expected credit loss impairment model. This new model replaced the, incurred loss impaired model used in the old   accounting standards. This change has implications not only on the entity’s financial statements but also on its accounting, financial and risk management systems

On 14 September 2016, the Financial Accounting Standard Board of Institute of Indonesia Chartered Accountants (DSAK IAI) approved Exposure Draft Statement of Financial Accounting Standard (Pernyataan Standar Akuntansi Keuangan) No. 71 on Financial Instrument (“PSAK 71”) which represents adoption of IFRS 9 on Financial Instruments issued by Internatio-nal Accounting Standard Board (IASB). This ED PSAK 71 will become effective for the financial statements beginning on or after 1 January 2019. Earlier application is permitted. One of the major changes in this PSAK is change in impairment model used. PSAK 71 introduces expected credit loss impairment models that use the forward looking information in measuring impairment loss on financial instruments.

Before the introduction of PSAK 71, the existing standard, that is PSAK 55, a financial asset is impaired if, and only if, there is objective evidence of impairment as a result of event or more events that occurred after initial recognition (a “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial that can be reliably estimated. Therefore, when lost events   occurred an entity should  recognize an impairment loss on financial asset, even if the loss expectation since initial recognition has not changed. This is known as ‘incurred loss’ model.

As an illustration, recent publication states that non-performing loan (NPL) of Indonesian banking is increased to 3.1 percent as per  January 2017. According to Bank Indonesia, NPL is a loan that is in default or close to being in default and categorized as sub-standard, doubtful and loss. To simplify, NPL is the sum of borrowed money upon which the debtor has not made his scheduled payments for at least 90 days. In incurred loss model, the increased of NPL is an event that triggered impairment review and impairment loss.

PSAK 71 introduces expected credit loss impairment models that use the forward looking information in measuring impairment loss on financial instruments. This model is more forward-looking. This is because holders of financial asset are not only required to consider historical information and information that provides objective evidence that  financial asset is impaired, but they also required to consider reasonable and supportable information that includes forecasts of future economic conditions when calculating expected credit losses. In expected loss model, impairment loss is a reflection of deterioration in the credit quality of financial instruments.

As illustrated above, impairment review and hence  impairment loss is applied only for impaired exposure that is NPLs. New impairment model covers all credit exposures not measured at fair value through profit or loss. Therefore loan quality of current and special mention, according Bank Indonesia classification, also included in impairment review. And, according to PSAK 71, by necessitating a 12-month expected credit loss allowance for all loans, it result in earlier recognition of credit losses.

Application of new impairment is expected to increase the credit allowances of many entities (with a cor-responding reduction in  equity on first-time adoption), particularly for financial institutions. Off course, the magnitude will vary entity by entity, depending on its portfolio and practices. Also, incorporation of forward-looking information may require adjustments and alignment between accounting, finance and credit risk management systems.   This is necessary since the risk models and data will be used extensively to make assessments and calculations required for accounting purposes.



  • Impairment model was changed from incurred loss to become expected loss model.
  • Expected loss model will recognize impairment loss sooner and increased the amount of impairment.
  • Adjustments and alignment between accounting, finance and credit risk management systems may be required in adopting PSAK 71.


This article has been published at The Jakarta Post, 17 April 2017