• whether cash flows that are expected to be recovered from the sale on default of
a loan could be included in the measurement of ECLs (see 5.8.2 below);
• application of the revolving credit facilities exception set out in paragraph 5.5.20
of IFRS 9 to multi-purpose facilities (see 12.1 below);
• how future drawdowns should be estimated for charge cards when measuring
ECLs if there is no specified credit limit in the contract (see 12.3 below);
• how an entity should determine the starting-point and the ending-point of the
maximum period to consider when measuring ECLs for revolving credit facilities
(see 12.2 below);
• when measuring ECLs, whether an entity can use a single forward-looking
economic scenario or whether an entity needs to incorporate multiple forward-
looking scenarios, and if so how (see 5.6 below);
Financial instruments: Impairment 3737
• when assessing significant increases in credit risk, whether an entity can use a
single forward-looking economic scenario or whether the entity needs to
incorporate multiple forward-looking scenarios, and if so how (see 6.7 below);
• whether there is a requirement to assess significant increases in credit risk for
financial assets with a maturity of 12 months or less (see 6 below);
• how to measure the gross carrying amount and loss allowance for credit-impaired
financial assets that are not purchased or originated credit-impaired and that are
measured at amortised cost (see 14.1.1 below); and
• whether an entity is required to present the loss allowance for financial assets
measured at amortised cost (or trade receivables, contract assets or lease
receivables) separately in the statement of financial position (see 14.1 below).
The FASB (see 1.4 above) has also set up its own Transition Resource Group (TRG) for
credit losses and its discussions may prove relevant to the application of IFRS 9 in areas
where the two ECL models are similar.
In addition, as part of its activities to support implementation, the IASB has published
two educational webcasts since IFRS 9 was published.9
• The first, on forward-looking information and multiple scenarios was released on
25 July 2016. It discussed when multiple scenarios need to be considered and the
concept of non-linearity, consistency of scenarios, probability-weighted
assessment of significant increase in credit risk, and approaches to incorporating
forward-looking scenarios (see 5.6 below).
• The second, on the expected life of revolving facilities was released on 16 May 2017.
It focused on how credit risk management actions would affect the expected life of
revolving facilities for the purpose of measuring ECLs (see 12.2 below).
1.6
Other guidance on expected credit losses
In November 2015, the Enhanced Disclosure Task Force (EDTF) published its report,
Impact of Expected Credit Loss Approaches on Bank Risk Disclosures, in which it
recommended disclosures for banks to provide with the implementation of the ECL
requirements of IFRS 9 and US GAAP (see 15 below).
In December 2015, the Basel Committee on Banking Supervision issued its Guidance on
accounting for expected credit losses, aimed primarily at internationally active banks,
which sets out supervisory expectations regarding sound credit risk practices associated
with implementing and applying an ECL accounting framework (see 7.1 below).
On 17 June 2016, the Global Public Policy Committee of representatives of the six largest
accounting networks (the GPPC) published The implementation of IFRS 9 impairment
by banks – Considerations for those charged with governance of systemically important
banks (the GPPC guidance) to promote a high standard in the implementation of
accounting for ECLs. It aims to help those charged with governance to evaluate
management’s progress during the implementation and transition phase. A year later, on
28 July 2017, the GPPC issued a paper titled The Auditor’s Response to the Risks of
Material Misstatement Posed by Estimates of Expected Credit Losses under IFRS 9 to
assist audit committees oversee the audit of ECLs (see 7.2 below).
3738 Chapter 47
2 SCOPE
IFRS 9 requires an entity to recognise a loss allowance for ECLs on: [IFRS 9.5.5.1]
• financial assets that are debt instruments such as loans, debt securities, bank
balances and deposits and trade receivables (see 10 below) that are measured at
amortised cost; [IFRS 9.4.1.2]
• financial assets that are debt instruments measured at fair value through other
comprehensive income (see 9 below); [IFRS 9.4.1.2A]
• finance lease receivables (i.e. net investments in finance leases) and operating lease
receivables under IAS 17 – Leases – and IFRS 16 (when applied) (see 10.2 below,
Chapter 23 and Chapter 24);
• contract assets under IFRS 15 – Revenue from Contracts with Customers –
(see 10.1 below and Chapter 28). IFRS 15 defines a contract asset as an entity’s right
to consideration in exchange for goods or services that the entity has transferred
to a customer when that right is conditional on something other than the passage
of time (for example, the entity’s future performance); [IFRS 15 Appendix A,
IFRS 9 Appendix A]
• loan commitments that are not measured at fair value through profit or loss under
IFRS 9 (see 11 and 12 below). The scope therefore excludes loan commitments
designated as financial liabilities at fair value through profit and loss and loan
commitments that can be settled net in cash or by delivering or issuing another
financial instrument; [IFRS 9.2.1(g), 2.3, 4.2.1(a), 4.2.1(d)] and
• financial guarantee contracts that are not measured at fair value through profit or
loss under IFRS 9 (see 11 below).
3 APPROACHES
In applying the IFRS 9 impairment requirements, an entity needs to follow one of the
approaches below:
• the general approach (see 3.1 below);
• the simplified approach (see 3.2 below); or
• the purchased or originated credit-impaired approach (see 3.3 below).
Figure 47.3 below, based on a diagram from the standard, summarises the process steps
in recognising and measuring ECLs.
Financial instruments: Impairment 3739
Figure 47.3 Application of the impairment requirements at a reporting date
Calculate a credit-
Is the financial instrument a purchased or Yes
adjusted effective
originated credit-impaired financial asset?
interest rate and
(see 3.3)
always recognise a loss
No
allowance for changes
in lifetime expected
Is the simplified approach for trade
Yes
credit losses
receivables, contract assets and lease
(see 3.3)
receivables applicable? (see 3.2)
No
Does the financial instrument have low
Is the low credit risk
Yes
credit risk at the reporting date?
simplification applied?
(see 6.4.1)
(see 6.4.1)
No
No
Yes
Has there been a
significant increase in
No
credit risk since initial recognition?
Recognise 12-month
(see 6)
expected credit losses
Yes
and calculate interest
revenue on gross
Recognise lifetime expected credit losses
carrying amount
(see 5.2)
(see 5.3)
And
Calculate interest
Calculate interest
revenue on amortised
revenue on the
Is the financial instrument a credit-impaired
No
Yes
cost i.e. the gross
gross carrying
financial asset?
carrying amount net of
amount
(see 3.1)
loss allowance
(see 3.1)
(see 3.1)
3.1 General
approach
Under the general approach, at each reporting date, an entity recognises a loss
allowance based on either 12-month ECLs or lifetime ECLs, depending on whether
there has been a significant increase in credit risk on the financial instrument since initial
recognition. [IFRS 9.5.5.3, 5.5.5]. The changes in the loss allowance balance are recognised
in profit or loss as an impairment gain or loss. [IFRS 9.5.5.8, Appendix A].
3740 Chapter 47
Essentially, an entity must make the following assessment at each reporting date:
• for credit exposures where there have not been significant increases in credit risk
since initial recognition, an entity is required to provide for 12-month ECLs, i.e.
the portion of lifetime ECLs that represent the ECLs that result from default events
that are possible within the 12-months after the reporting date (stage 1 in Figure
47.2 at 1.2 above); [IFRS 9.5.5.5, Appendix A]
• for credit exposures where there have been significant increases in credit risk since
initial recognition on an individual or collective basis, a loss allowance is required
for lifetime ECLs, i.e. ECLs that result from all possible default events over the
expected life of a financial instrument (stages 2 and 3 in Figure 47.2 at 1.2 above);
[IFRS 9.5.5.4, 5.5.3, Appendix A] or
• in subsequent reporting periods, if the credit quality of the financial instrument
improves such that there is no longer a significant increase in credit risk since initial
recognition, then the entity reverts to recognising a loss allowance based on 12-
month ECLs (i.e. the approach is symmetrical). [IFRS 9.5.5.7].
It may not be practical to determine for every individual financial instrument whether
there has been a significant increase in credit risk, because they may be small and many
in number and/or because there may not be the evidence available to do so. [IFRS 9.B5.5.1].
Consequently, it may be necessary to measure ECLs on a collective basis, to
approximate the result of using comprehensive credit risk information that incorporates
forward-looking information at an individual instrument level (see 6.5 below).
[IFRS 9.BC5.141].
The standard includes practical expedients, in particular the use of a simplified
approach (see 3.2 below) and a provision matrix (see 10.1 below) which should help in
measuring the loss allowance for trade receivables.
To help enable an entity’s assessment of significant increases in credit risk, IFRS 9 also
provides the following operational simplifications:
• a low credit risk threshold equivalent to investment grade (see 6.4.1 below), below
which no assessment of significant increases in credit risk is required;
• the ability to rely on past due information if reasonable and supportable forward
looking information is not available without undue cost or effort (see 6.4.2 below).
This is subject to the rebuttable presumption that there has been a significant
increase in credit risk if the loan is 30 days past due (see 6.2.2 below); and
• use of a change in the 12-month risk of a default as an approximation for change in
lifetime risk (see 6.4.3 below).
The IFRS 9 illustrative examples also provide the following suggestions on how to
implement the assessment of significant increases in credit risk:
• assessment at the counterparty level (see 6.4.4 below); and
• a set transfer threshold by determining maximum initial credit risk for a portfolio
(see 6.4.5 below).
In stages 1 and 2, there is a complete decoupling between interest recognition and
impairment. Therefore, interest revenue is calculated on the gross carrying amount
(without deducting the loss allowance). If a financial asset subsequently becomes credit-
Financial instruments: Impairment 3741
impaired (stage 3 in Figure 47.2 at 1.2 above), an entity is required to calculate the
interest revenue by applying the EIR in subsequent reporting periods to the amortised
cost of the financial asset (i.e. the gross carrying amount net of loss allowance) rather
than the gross carrying amount. [IFRS 9.5.4.1, Appendix A]. Financial assets are assessed as
credit-impaired using substantially the same criteria as for the impairment assessment
of an individual asset under IAS 39. [IFRS 9 Appendix A].
A financial asset is credit-impaired when one or more events that have a detrimental
impact on the estimated future cash flows of that financial asset have occurred.
Evidence that a financial asset is impaired includes observable data about such events.
IFRS 9 provides a list of events that are substantially the same as the IAS 39 loss events
for an individual asset assessment: [IFRS 9 Appendix A]
• significant financial difficulty of the issuer or the borrower;
• a breach of contract, such as a default or past due event;
• the lender(s) of the borrower, for economic or contractual reasons relating to the
borrower’s financial difficulty, having granted to the borrower a concession(s) that
the lender(s) would not otherwise consider;
• it is becoming probable that the borrower will enter bankruptcy or other financial
reorganisation;
• the disappearance of an active market for that financial asset because of financial
difficulties; or
• the purchase or origination of a financial asset at a deep discount that reflects the
incurred credit losses.
It may not be possible for an entity to identify a single discrete event. Instead, the
combined effect of several events may have caused the financial asset to become credit-
impaired. [IFRS 9 Appendix A].
There have also been some debate as to whether financial assets that are considered to
be in default (e.g. because payments are more than 90 days past due) but that are fully
collateralised (so that there is no ECL) would qualify as credit-impaired and therefore
have to be transferred to stage 3. Although the definition of credit-impaired refers to ‘a
detrimental impact on the estimated future cash flows’, it is not clear whether this
should be read to include any recoveries from the realisation of collateral and IFRS 9
has no explicit requirements to consider collateral when assessing credit-impaired
financial assets.
There are some strong arguments in favour of aligning the criteria for transferring an
asset to stage 3 with those for assessing wheth
er it is in default. First, IFRS 9 bases
significant deterioration on risk of a default occurring and it would therefore seem
inconsistent (and potentially confusing for users) if the value of collateral is considered
for stage 3 allocation. Also, if collateral value were to influence the stage 3 allocation,
this could result in some instability between stage 2 and 3, as exposures would
potentially go back and forth depending on the collateral value.
Aligning stage 3 with the default status affects the scope of instruments to which the
purchased or originated credit-impaired approach must be applied. However, for any
exposure which is fully collateralised and where the expected loss is zero, classification
3742 Chapter 47
as a purchased or originated credit-impaired financial asset, or classification between
stage 1, 2 or 3 does not affect the accounting. If the expected loss is zero, it will not affect
the EIR calculation.
Also, IFRS 7 requires a quantitative disclosure about the collateral held as security and
other credit enhancements for financial assets that are credit-impaired at the reporting
date (e.g. quantification of the extent to which collateral and other credit enhancements
mitigate credit risk). [IFRS 7.35K(c)].
In subsequent reporting periods, if the credit quality of the financial asset improves so
that the financial asset is no longer credit-impaired and the improvement can be related
objectively to the occurrence of an event (such as an improvement in the borrower’s
credit rating), then the entity should once again calculate the interest revenue by
applying the EIR to the gross carrying amount of the financial asset. [IFRS 9.5.4.2].
When the entity has no reasonable expectations of recovering a financial asset, in its
entirety or a portion thereof, then the gross carrying amount of the financial asset should
be directly reduced in its entirety. A write-off constitutes a derecognition event
(see 14.1.1 below). [IFRS 9.5.4.4].
3.2 Simplified
approach
The simplified approach does not require an entity to track the changes in credit risk,
but instead requires the entity to recognise a loss allowance based on lifetime ECLs at
each reporting date. [IFRS 9.5.5.15].
An entity is required to apply the simplified approach for trade receivables or contract
assets that result from transactions within the scope of IFRS 15 and that do not contain
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 739
