41. Credit institutions’ accounting policies should address, and their allowance methodology should …

Credit institutions’ accounting policies should address, and their allowance methodology should include, criteria for (a) renegotiations/modifications of lending exposures due to financial difficulties or for other reasons, considering also the specific definitions of forbearance established in Part 2 of Annex V of Commission Implementing Regulation (EU) 680/2014 and (b) the treatment of purchased or originated credit-impaired lending exposures as defined under the applicable accounting framework:

• a. Credit institutions should take into account the following criteria regarding renegotiations/modifications of lending exposures:
• i. The allowance methodology should enable credit institutions to perform a robust assessment of credit risk and measurement of ECL such that the allowance level continues to reflect the collectability of the substance of the renegotiated/modified exposure, irrespective of whether or not the original asset is derecognised under the applicable accounting framework.
• ii. Renegotiations/modifications should not automatically lead to the conclusion that there has been an immediate decrease in the credit risk of the exposure. Any decrease in the reported allowance level due to improved credit risk should be supported by strong evidence. Customers should demonstrate consistently satisfactory payment performance over a reasonable period of time before credit risk would be considered to have decreased, considering also the relevant requirements for exposures in the probation period as defined in Part 2 of Annex V of Commission Implementing Regulation (EU) 680/2014.
• iii. Credit institutions should carefully consider whether the collection of loan principal is reasonably assured when repayment performance takes the form of interest payments alone, subsequent to a renegotiation or modification. In addition, further expected delays in the payment of those cash flows may evidence that credit risk has not improved, and thus the level of ECL should be reassessed carefully.
• iv. The methodologies should also call upon the lending staff to promptly notify the institution’s accounting function when exposures are renegotiated or modified to ensure appropriate accounting for the change. For more complex renegotiations and modifications, regular communication between the lending staff and the accounting function should take place.
• b. Credit institutions should take into account the following criteria regarding purchased or originated credit-impaired lending exposures:
• i. The methodology should enable appropriate identification and accounting for purchased or originated credit-impaired lending.
• ii. The cash flow estimates for these lending exposures should be reviewed each reporting period and updated as necessary. Such updates should be properly supported and documented, and approved by senior management. 4.2.3 Principle 3 — Credit risk rating process and grouping

A credit institution should have a credit risk rating process in place to appropriately group lending exposures on the basis of shared credit risk characteristics.

Credit risk rating process

1. Forbhreathnú

1.1 Tagairtí

1.2 Ceanglais aitheanta

1.3 Caighdeáin ghaolmhara

2. Ceanglais aitheanta

3. Caighdeáin ghaolmhara

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