6 GENERAL APPROACH: DETERMINING SIGNIFICANT INCREASES IN
CREDIT RISK ................................................................................................ 3780
6.1
Change in the risk of a default occurring ....................................................... 3781
6.1.1
Impact of collateral, credit enhancements and financial
guarantee contracts ............................................................................ 3783
6.1.2 Contractually
linked instruments (CLIs) and subordinated
interests ................................................................................................ 3785
6.1.3
Determining change in the risk of a default under the loss
rate approach...................................................................................... 3786
6.2
Factors or indicators of changes in credit risk ............................................. 3786
6.2.1
Examples of factors or indicators of changes in credit risk ....... 3787
6.2.2
Past due status and more than 30 days past due rebuttable
presumption ......................................................................................... 3790
6.2.3
Illustrative examples of factors or indicators when
assessing significant increases in credit risk .................................. 3791
6.2.4
Use of behavioural factors ................................................................ 3795
6.3
What is significant? ............................................................................................. 3797
6.4 Operational
simplifications
..............................................................................
3798
6.4.1
Low credit risk operational simplification ................................... 3798
6.4.2 Delinquency
........................................................................................ 3803
6.4.3
12-month risk as an approximation for change in lifetime
risk ........................................................................................................ 3804
6.4.4
Assessment at the counterparty level ............................................ 3805
6.4.5
Determining maximum initial credit risk for a portfolio ........... 3806
6.5
Collective assessment ....................................................................................... 3809
Financial instruments: Impairment 3721
6.5.1
Example of individual assessment of changes in credit risk ...... 3810
6.5.2
Basis of aggregation for collective assessment ............................. 3811
6.5.3
Example of collective assessment (‘bottom up’ and ‘top
down’ approach) .................................................................................. 3813
6.6
Determining the credit risk at initial recognition of an identical
group of financial assets .................................................................................... 3816
6.7
Multiple scenarios for the assessment of significant increases in
credit risk .............................................................................................................. 3817
7 OTHER MATTERS AND ISSUES IN RELATION TO THE EXPECTED
CREDIT LOSS CALCULATIONS .................................................................... 3819
7.1
Basel guidance on accounting for expected credit losses .......................... 3819
7.2
Global Public Policy Committee (GPPC) guidance .................................... 3822
7.3
Measurement dates of expected credit losses ............................................. 3823
7.3.1
Date of derecognition and date of initial recognition ................ 3823
7.3.2
Trade date and settlement date accounting ................................. 3825
7.4
Interaction between the initial measurement of debt instruments
acquired in a business combination and the impairment model of
IFRS 9 ................................................................................................................... 3825
7.5
Interaction between expected credit losses calculations and fair
value hedge accounting .................................................................................... 3827
8 MODIFIED FINANCIAL ASSETS .................................................................. 3828
8.1
Accounting treatment if modified financial assets are derecognised ...... 3828
8.2
Accounting treatment if modified financial assets are not
derecognised ....................................................................................................... 3829
9 FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH OTHER
COMPREHENSIVE INCOME .......................................................................... 3831
9.1
Accounting treatment for debt instruments measured at fair value
through other comprehensive income ........................................................... 3831
9.2
Interaction between foreign currency translation, fair value hedge
accounting and impairment ............................................................................. 3832
10 TRADE RECEIVABLES, CONTRACT ASSETS AND LEASE RECEIVABLES ... 3837
10.1 Trade receivables and contract assets ........................................................... 3838
10.2 Lease
receivables
...............................................................................................
3839
11 LOAN COMMITMENTS AND FINANCIAL GUARANTEE CONTRACTS ........ 3839
12 REVOLVING CREDIT FACILITIES ................................................................ 3844
12.1 Scope of the exception ..................................................................................... 3844
12.2 The period over which to measure ECLs ..................................................... 3847
12.2.1
The requirements of the standard .................................................. 3847
12.2.2
Guidance provided by the ITG ....................................................... 3850
3722 Chapter 47
12.2.3 Guidance
provided
by the IASB webcast ..................................... 3852
12.2.4 Interaction with derecognition ....................................................... 3854
12.3 Exposure at default (EAD) ............................................................................... 3855
12.4 Time value of money ........................................................................................ 3856
12.5 Determining significant increase in credit risk ............................................. 3857
13 INTERCOMPANY LOANS ............................................................................. 3858
14 PRESENTATION OF EXPECTED CREDIT LOSSES IN THE STATEMENT
OF FINANCIAL POSITION ............................................................................ 3862
14.1 Allowance for financial assets measured at amortised cost, contract
assets a
nd lease receivables ............................................................................. 3862
14.1.1
Write-off .............................................................................................. 3863
14.1.2
Presentation of the gross carrying amount and expected
credit loss allowance for credit-impaired assets ......................... 3864
14.2 Provisions for loan commitments and financial guarantee contracts .......... 3867
14.3 Accumulated impairment amount for debt instruments measured at
fair value through other comprehensive income ........................................ 3867
15 DISCLOSURES.............................................................................................. 3867
16 EFFECTIVE DATE AND TRANSITION ......................................................... 3869
16.1 Effective date ...................................................................................................... 3869
16.2 Transition
............................................................................................................
3869
16.2.1
Restatement of comparatives .......................................................... 3869
16.2.2 Initial credit risk and significant increases in credit risk on
transition.............................................................................................. 3870
List of examples
Example 47.1:
Expected credit loss allowance in stages 1, 2 and 3 under
the general approach ......................................................................... 3731
Example 47.2:
Calculation of the credit-adjusted effective interest rate
and recognition of a loss allowance for a purchased credit-
impaired financial asset ..................................................................... 3745
Example 47.3:
12-month and lifetime expected credit loss measurement
based on a PD approach.................................................................... 3753
Example 47.4:
12-month expected credit losses measurement based on a
loss rate approach ............................................................................... 3756
Example 47.5:
Determining the maximum contractual period when
measuring expected credit losses ................................................... 3760
Example 47.6:
Incorporating single versus multiple forward-looking
scenarios when measuring expected credit losses ......................3762
Example 47.7:
Highly collateralised financial asset ................................................ 3783
Financial instruments: Impairment 3723
Example 47.8:
Significant increase in credit risk .................................................... 3791
Example 47.9:
No significant increase in credit risk ..............................................3792
Example 47.10:
Assessment of a significant increase in credit risk based on
a PD approach ..................................................................................... 3793
Example 47.11:
Public investment-grade bond ......................................................... 3801
Example 47.12:
Use of credit ratings and/or CDS spreads to determine
whether there have been significant increases in credit
risk and to estimate expected credit losses .................................. 3802
Example 47.13:
Counterparty assessment of credit risk ......................................... 3806
Example 47.14:
Comparison to maximum initial credit risk .................................. 3807
Example 47.15:
Individual assessment in relation to responsiveness to
changes in credit risk ......................................................................... 3811
Example 47.16:
Collective assessment in relation to responsiveness to
changes in credit risk (‘bottom up’ approach) ............................... 3813
Example 47.17:
Collective assessment in relation to responsiveness to
changes in credit risk (‘top down’ approach) ................................ 3814
Example 47.18:
Modification of contractual cash flows ......................................... 3829
Example 47.19:
Debt instrument measured at fair value through other
comprehensive income ..................................................................... 3831
Example 47.20:
Interaction between the fair value through other
comprehensive income measurement category and
foreign currency denomination, fair value hedge
accounting and impairment ............................................................. 3833
Example 47.21:
Provision matrix ................................................................................. 3838
Example 47.22:
Determining the initial and subsequent measurement of a
financial guarantee contract where premiums are
receivable upfront or over the life of the guarantee .................. 3842
Example 47.23:
Revolving credit facilities ................................................................. 3848
Example 47.24:
Estimating the life of revolving credit facilities ........................... 3853
Example 47.25:
Disclosing the gross carrying amount and loss allowance
for credit-impaired financial assets that are not purchased
or originated credit-impaired .......................................................... 3864
Example 47.26:
Presentation of the interest revenue, gross carrying
amount, loss allowance and amortised cost for when
assets move from stage 2 to stage 3 and vice versa .................... 3866
3724 Chapter 47
3725
Chapter 47
Financial instruments:
Impairment
1 INTRODUCTION
This chapter discusses the new forward-looking expected credit loss (‘ECL’) model as
set out in IFRS 9 – Financial Instruments, accompanied by 14 illustrative examples. The
ECL requirements must be adopted with the requirements of IFRS 9 for classification
and measurement, for annual reporting periods beginning after 1 January 2018. Early
application was permitted if the IFRS 9 classification and measurement requirements
were adopted at the same time.
Since the standard was issued in 2014, a number of interpretation and application issues
have been identified, many of which have been the subject of discussion by the IFRS
Transition Resource Group for Impairment of Financial Instruments (ITG) established
by the IASB and further guidance has been provided by the IASB in the form of webcasts
and by banking regulators.
This chapter also briefly describes the new credit risk disclosures in relation to the ECL
model as set out in IFRS 7 – Financial Instruments: Disclosures – (see 15 below). A more
detailed discussion of the disclosure requirements can be found in Chapter 50 at 5.3.
1.1
Brief history and background of the impairment project
During the 2007/8 global financial crisis, the delayed recognition of credit losses that are
existing accounting standards. This is primarily due to the fact that the previous
impairment requirements under IAS 39 – Financial Instruments: Recognition and
Measurement – were based on an incurred loss model, i.e. credit losses were not
recognised until a credit loss event had occurred. Since losses are rarely incurred evenly
over the lives of loans, there was a mismatch in the timing of the recognition of the credit
spread inherent in the interest charged on the loans over their lives and any impairment
losses that was only recognised at a later date. A further identified weakness was the
complexity of different entities using different approaches to calculate impairment.
As part of the joint approach by the IASB and the FASB to deal with the financial reporting
issues arising from the financial crisis, the boards set up the Financial Crisis Advisory
3726 Chapter 47
Group (FCAG) in October 2008 to consider how improvements in financial reporting could
help to enhance investor confidence in financial markets. Not long after, the leaders of the
Group of 20 (also known as the G20) published a report Declaration on Strengthening the
Financial System in April 2009 that called on the accounting standard setters to reduce the
complexity of accounting standards for financial instruments and to strengthen accounting
recognition of loan-loss provisions by incorporating a broader range of credit information.1
In July 2009, the FCAG presented its report to the IASB and the FASB about the standard-
setting implications of the global financial crisis. Consistent with the G20’s recommendations,
the FCAG also recommended both the IASB and the FASB to explore alternatives to the
incurred loss model for loan loss provisioning that used more forward-looking information.2
In June 2009, the IASB published a request for information – Impairment of Financial
Assets: Expected Cash Flow Approach – on the feasibility of an expected loss model for
the impairment of financial assets. Following this, in November 2009, the IASB issued an
Exposure Draft – Financial Instruments: Amortised Cost and Impairment (the 2009 ED)
that proposed an impairment model based on expected losses rather than on incurred
losses, for all financial assets recorded at amortised cost. In this approach, the initial ECLs
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 736
