Forbearance and loan modifications

When borrowers struggle, banks often agree new terms rather than enforce. Forbearance keeps borrowers paying, but it changes the accounting in two ways: the loan's carrying amount and its stage. This guide works through a forborne loan, explains when a modification becomes a derecognition, and covers the staging and probation rules banks apply.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. 3 minute read.

Short answer

Forbearance is a concession a bank grants to a borrower in financial difficulty, such as lower interest, a payment holiday or a longer term. Under IFRS 9, a forborne loan is usually modified rather than derecognised: the bank recalculates its gross carrying amount as the present value of the new cash flows at the original effective interest rate and recognises a modification loss. Forbearance is also strong evidence of a significant increase in credit risk, and often of credit impairment. In this guide's example, cutting the rate on a 1,000,000 loan from 8% to 4% for its last 3 years creates a modification loss of 103,084.

At a glance

Forbearance
Concession to a borrower in difficulty
Usual accounting
Modification, not derecognition
Measurement
New cash flows at the original EIR
Result
Modification gain or loss
Staging
At least stage 2, often stage 3
Cure
After a probation period
Forbearance and loan modificationsForbearance: Concession to a borrower in difficulty; Usual accounting: Modification, not derecognition; Measurement: New cash flows at the original EIR; Result: Modification gain or loss; Staging: At least stage 2, often stage 3; Cure: After a probation period.KEY FACTS AT A GLANCEForbearance and loan modificationsForbearanceConcession to a borrowerin difficultyUsual accountingModification, notderecognitionMeasurementNew cash flows at theoriginal EIRResultModification gain or lossStagingAt least stage 2, oftenstage 3CureAfter a probation periodTax BakersForbearance and loan modificationsForbearance: Concession to a borrower in difficulty; Usual accounting: Modification, not derecognition; Measurement: New cash flows at the original EIR; Result: Modification gain or loss; Staging: At least stage 2, often stage 3; Cure: After a probation period.KEY FACTS AT A GLANCEForbearance and loan modificationsForbearanceConcession to a borrower in difficultyUsual accountingModification, not derecognitionMeasurementNew cash flows at the original EIRResultModification gain or lossStagingAt least stage 2, often stage 3CureAfter a probation periodTax Bakers
Key facts at a glance, as set out in this guide.

A forbearance example

A borrower owes 1,000,000 on a loan at 8%, with interest paid annually and the principal due in 3 years. After losing a major customer, the borrower asks for relief, and the bank agrees to cut the interest rate to 4% for the remaining 3 years.

Effect of forbearance on the loanEffect of forbearance on the loan1,000,000Beforeforbearance-103,084Modificationloss896,916New grossamount
The concession is recognised as a loss at the original effective rate.
YearNew cash flowDiscounted at the original 8%
140,00037,037
240,00034,294
31,040,000825,586
New gross carrying amount896,916

The gross carrying amount falls from 1,000,000 to 896,916, and the bank recognises a modification loss of 103,084 in profit or loss: Dr Modification loss 103,084, Cr Loan 103,084. Interest income continues at the original 8% on the new carrying amount, so the loss unwinds as extra interest income over the three years if the borrower pays as agreed.

When does a modification lead to derecognition?

When the terms change so substantially that the original loan is, in effect, replaced by a new one, for example a change of currency, conversion into equity, or a new borrower. IFRS 9 gives no bright-line test for financial assets, so banks set qualitative and quantitative criteria in their policies. Forbearance for borrowers in difficulty rarely leads to derecognition, because the bank is trying to recover the same debt. See modifications of financial assets.

Which stage is a forborne loan in?

Forbearance is granted because of financial difficulty, so the loan's credit risk has almost always increased significantly since origination: at least stage 2. If the concession is one the bank would not otherwise consider, and the borrower is in significant financial difficulty, the loan is usually credit-impaired, stage 3. The modification is also a qualitative trigger that SICR models must capture. See significant increase in credit risk and credit-impaired assets.

When can a forborne loan return to stage 1?

Only after the borrower has shown a sustained period of payments under the new terms and credit risk is no longer significantly higher than at origination. Banks apply probation periods, and supervisors in many jurisdictions expect performing forborne loans to stay flagged for a period, often up to two years, before the forbearance status is removed.

How is ECL measured after a modification?

On the modified loan, using the new contractual cash flows, and for SICR purposes by comparing current credit risk with the risk at the original origination date, not at the modification date, unless the loan was derecognised and a new one recognised. The modification loss and the ECL are separate: the loss reflects the agreed concession, the ECL the risk the borrower still fails.

Were pandemic payment holidays forbearance?

Not automatically. Blanket payment deferrals offered to all borrowers in 2020 did not by themselves indicate a significant increase in credit risk for each borrower; banks assessed staging using other information. Deferrals given to individual borrowers because of their own financial difficulty were forbearance.

What do banks disclose about forbearance?

The amortised cost of loans modified during the period while in stage 2 or 3, the net modification gains or losses, and the gross carrying amount of modified loans that moved back to stage 1. Regulators often require separate forbearance reporting as well. See write-off policies and bank accounting.

Need help applying the standards?

Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.

Book a call Chat on WhatsApp

Questions people ask

What is forbearance in banking?

A concession granted to a borrower in financial difficulty, such as reduced interest, a payment holiday or an extended term.

How is a forborne loan accounted for under IFRS 9?

Usually as a modification: the gross carrying amount is recalculated at the original effective interest rate and a modification loss recognised.

Is a forborne loan in stage 2 or stage 3?

At least stage 2, and often stage 3 when the borrower is in significant financial difficulty.

When can a forborne loan return to stage 1?

After a sustained period of payments under the new terms, often a probation period of up to two years.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 9 Financial Instruments

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IFRS 9Modification of financial assets and liabilities under IFRS 9ECLSignificant increase in credit risk (SICR)BankingBank accounting: the key IFRS issues

More in Banking

Previous in this topicCustomer deposits and fundingNext in this topicWrite-off policies for banksTopicAll 15 guides in Banking

This guide is general information. It is not tax or legal advice for your situation.