In this, we're looking at bank A that has in the past granted 100 million of auto loans.

However, the bank has determined based on its own internal threshold that the loan portfolio is now non-performing.

And as a result, this loan portfolio is gonna be classified as stage three.

Under IFRS, we're asked to calculate the interest on the loan portfolio, but to do that, first of all, we have to calculate the net loan amount that will be shown on the bank's balance sheet.

So let's take the gross loan amount, the a hundred million.

We then need to calculate the expected credit loss provision, which for stage three assets, is based on the expected lifetime probability of default and loss given default numbers.

So we take the 100, multiply by the 5% lifetime probability of default, and the 40% loss given default over the lifetime of the assets.

This gives us an expected credit loss provision of two, and as a result, the net loan amount to be shown on the balance sheet will be 98.

This is the same balance sheet approach as we would have for stage two assets.

However, when it comes to calculating the interest income in the income statement, we need to apply the 10% interest rate to the net loan amount.

That is the difference for stage three compared to stage two.

And as a result, the amount of interest income in the income statement will not be 10 million, 10% of the a hundred million gross loan portfolio, but instead only 9.8 10% of the net loan amount.