Computation of discount for purchased assets

Article 166(1) CRR stipulates that “the exposure value of on-balance sheet exposures shall be the accounting value measured without taking into account any credit risk adjustment made”, unless noted otherwise. Article 24(1) CRR stipulates that “the valuation of assets and off-balance sheet items shall be effected in accordance with the applicable accounting framework”, as defined in point (77) of Article 4 (1) CRR). In this sense, the CRR provisions take what is recorded on the balance sheet of an institution in accordance with applicable accounting rules as a starting point for prudential purposes. Consequently, for the calculation of the exposure value under the IRB approach, credit risk adjustments shall be disregarded. In order to do so, where the accounting value recorded in the balance sheet of the institution is net of such adjustments, the latter will have to be added back for the calculation of the exposure value. According to the first subparagraph of Article 166(1) CRR, the same rule also applies to “assets purchased at a price different than the amount owed” meaning that in this case, too, the exposure value for prudential purposes shall be the gross accounting value that is, measured without taking into account any credit risk adjustments or discounts as set out in Article 166 (1). In practice this means that where credit risk adjustments or discounts referred under this provision have reduced the accounting value, they have to be added back (or subtracted in the case of premiums) to obtain the exposure value. In this sense, Article 166(1) ensures that under the IRB approach the exposure values for exposures are calculated in the same way, irrespective of the applicable accounting framework, and also whether the exposure was originated by the institution or purchased subsequently. Article 159 CRR provides that the expected loss amounts shall be subtracted “from the general and specific credit risk adjustments and additional value adjustments in accordance with Articles 34 and 110 CRR and other own funds reductions related to these exposures”, and that in doing so discounts on balance sheet exposures purchased when in default shall be treated “in the same manner as specific credit risk adjustments”. However, neither Article 166(1) nor Article 159 CRR provide for a general assimilation of discounts on purchased exposures to specific credit risk adjustments. Please see also Q&A 101 and Q&A 354 .