Valuation of foreclosed assets
Credit institutions should strongly consider classifying foreclosed assets as non-current assets held for sale under IFRS 5. This accounting treatment implies that the asset must be available for immediate sale in its present condition (IFRS 5.7), that the management body should approve an individual plan to sell the asset within a short timeframe (normally one year) and that an active sales policy should be pursued (IFRS 5.8); thus, it favours recoveries.
Foreclosed assets received should be valued at the lower of:
a) the amount of the financial assets applied, treating the asset foreclosed or received in payment of debt as collateral;
b) the fair value of the repossessed asset, less selling costs.
When fair value is not obtained by reference to an active market but is based on a valuation technique (either level 2 or level 3), some adjustments are necessary, in particular as a result of two factors: a) The condition or location of the assets. Risk and uncertainty regarding the asset should be incorporated in the fair value estimation.
b) The volume or level of activity of the markets in relation to these assets. The credit institution’s previous experience of the entity in realisations and of the differences between amounts arrived at using the valuation technique and the final amounts obtained in realisations should be incorporated into the calculation. The assumptions made in order to measure this adjustment may be documented, and should be available to the supervisor on request. Illiquidity discounts may be considered.
When credit institutions’ foreclosed assets are still under construction and it is decided to complete construction before selling the asset, they should demonstrate the merits of such a strategy and the cost should not exceed the fair value less costs to complete and sell the asset taking into account an appropriate illiquidity discount as described above.
When a foreclosed asset has exceeded the average holding period for similar assets for which active sales policies are in place, credit institutions should revise the illiquidity discount applied in the valuation process described above, increase it accordingly. In these circumstances, the credit institution should refrain from recognising write-backs/reversals of existing accumulated impairment on the asset, as its prolonged presence on the balance sheet provides evidence that the credit institution is unable to sell the asset at an increased valuation.
The frequency of valuation of foreclosed assets and the applicable procedures should follow the treatment of immovable property as set out in sections 9.1.2 and 9.2.