Impact of Estimating Fair Values of Bank Loans Using the Approach of the International Financial Reporting Standards (Case Study: An Iranian Bank)

Abstract

In this paper, fair value and impairment of an Iranian bank's loan portfolio is estimated using the approach of International Financial Reporting Standards and the result is compared with values using the approach of Central Bank of Iran which is based on reporting historical cost and incurred loss. Present value of future cashflows and expected credit loss are used for calculating fair value. Expected credit loss is estimated through predicting probability of default and loss given default based on models developed using neural network method and data from loans paid during years 2007 to 2016. The results of fair value and expected credit loss from 208 loan contracts, which comprise 82 percent of bank's total loan portfolio in 2017, show that the ratio of expected credit loss to incurred loss is 2/3 which is considerable, but the ratio of the fair value to historical cost is 97 percent which is not considerable. Furthermore, findings show that the approach of IFRS has an impact on the capital adequacy ratio of the bank and reduces it.

Keywords

• Capital Adequacy
• Expected credit loss
• Fair value
• IFRS
• Loan