reasonable and supportable information should be available ‘without undue cost or
effort’. The guidance states that banks are not expected to read this ‘restrictively’. It goes
on to say that, ‘Since the objective of the IFRS 9 model is to deliver fundamental
improvements in the measurement of credit losses ... this will potentially require costly
upfront investment in new systems and processes’. Such costs ‘should therefore not be
considered undue’.24
Much of the guidance relates to systems and controls and so is outside the scope of this
publication. The requirements of the main section that relate to accounting include:
1.
There should be commonality in the processes, systems, tools and data used to assess
credit risk and to measure ECLs for accounting and for regulatory capital purposes.25
2. When a bank’s individual assessment of exposures does not adequately consider
forward-looking information, it is appropriate to group lending exposures with
shared credit risk characteristics to estimate the impact of forward-looking
information, including macroeconomic factors (see 6.5 above).26 The grouping of
lending exposures into portfolios with shared credit risk characteristics must be
re-evaluated regularly (including re-segmentation in light of relevant new
information or changes in the bank’s expectations). Groupings must be granular
enough to assess changes in credit risk and changes in a part of the portfolio must
not be masked by the performance of the portfolio as a whole.27
3.
‘Adjustments’ may be used to address events, circumstances or risk factors that are
not fully considered in credit rating and modelling processes. But the Committee
expects that such adjustments will be temporary. If the reason for an adjustment is
not expected to be temporary then the processes should be updated to incorporate
that risk driver. The guidance goes on to say that adjustments require judgement
and create the potential for bias. Therefore, they should be subject to appropriate
governance processes.28
4.
The ‘consideration of forward-looking information and macroeconomic factors is
considered essential to the proper implementation of an ECL model. It cannot be
avoided on the basis that the banks considers the costs to be excessive or
unnecessary or because there is uncertainty in formulating forward looking
scenarios’. However, the Committee recognises that an ECL is ‘an estimate and
thus may not perfectly predict actual outcomes. Accordingly, the need to
incorporate such information is likely to increase the inherent degree of
subjectivity in ECL estimates, compared with impairment measured using incurred
loss approaches’. Also, the Basel Committee recognises that it may not always be
possible to demonstrate a strong link in formal statistical terms between certain
Financial instruments: Impairment 3821
types of information and the credit risk drivers. Consequently, a bank’s
experienced credit judgement will be crucial in establishing the appropriate level
for the individual or collective allowance.29
5.
Although the final version of the guidance says less about disclosures than the draft
version, given the publication of the Enhanced Disclosure Task Force (EDTF)
recommendations, disclosure remains one of the key principles (see 15 below or
Chapter 50 at 9.2).
The guidance is supplemented by an appendix that outlines additional supervisory
requirements specific to jurisdictions applying the IFRS 9 ECL model. The key
requirements are outlined below:
1.
A bank’s definition of default adopted for accounting purposes should be guided
by the definition used for regulatory purposes, which includes both a qualitative
‘unlikeliness to pay’ criterion and an objective 90-days-past-due criterion,
described by the Committee as a ‘backstop’.
2.
The IFRS 9 requirement to assess whether exposures have significantly increased
in credit risk ‘is demanding in its requirements for data, analysis and use of
experienced credit judgement’. The determination should be made ‘on a timely
and holistic basis’, considering a wide range of current information. It is critical that
banks have processes in place to ensure that financial instruments, whether
assessed individually or collectively, are moved from the 12-month to the lifetime
ECL measurement as soon as credit risk has increased significantly. Credit losses
very often begin to deteriorate a considerable period of time before an actual
delinquency occurs and delinquency data are generally backward-looking.
Therefore, ‘the Committee believes that they will seldom on their own be
appropriate in the implementation of an ECL approach by a bank.’ Instead, banks
need to consider the linkages between macroeconomic factors and borrower
attributes, using historical information to identify the main risk drivers, and current
and forecast conditions and experienced credit judgement to determine loss
expectations. This will apply not only to collective assessments of portfolios but
also for assessments of individual loans. The guidance gives the example of a
commercial property loan, for which the bank should assess the sensitivity of the
property market to the macroeconomic environment and use information such as
interest rates or vacancy rates to make the assessment.30
3. In assessing whether there has been a significant increase in credit risk, banks
should not rely solely on quantitative analysis. The guidance draws banks’
attention to the list of qualitative indicators set out in paragraph B5.5.17 of the
standard. Particular consideration should be given to a list of conditions, including
an increased credit spread for a particular loan, a decision to strengthen collateral
and/or covenant requirements, a downgrade by a credit rating agency or within the
bank’s internal credit rating system, a deterioration in future cash flows, or an
expectation of forbearance or restructuring. Also, the guidance stresses that the
sensitivity of the risk of a default occurring to rating downgrades increases strongly
as rating quality declines. Therefore, the widths of credit risk grades need to be set
appropriately, so that significant increases in credit risk are not masked. Further,
‘if a decision is made to intensify the monitoring of a borrower or class of
3822 Chapter 47
borrowers, it is unlikely that such action would have been taken ... had the increase
in credit risk not been perceived as significant.’31
4.
Exposures that are transferred to stage 2 and that are subsequently renegotiated or
modified, but not derecognised, should not be moved back to stage 1 until there is
sufficient evidence that the credit risk over the remaining life is no longer
significantly higher than on initial recognition. ‘Typically, a customer would need
to demonstrate consistently good payment behaviour over a period of time before
the credit risk is considered to have decreased.’32
5. IFRS 9 includes a number of practical expedients (see 6.4 above). However, as
banks are in the business of lending and it is unlikely
that obtaining relevant
information will involve undue cost or effort, the Basel Committee expects their
limited use by internationally active banks. For instance:
a.
The long-term benefit of a high-quality implementation of an ECL model that
takes into account all reasonable and supportable information far outweighs
the associated costs.
b. The use of the low credit risk simplification is considered a low-quality
implementation of the ECL model and its use should be limited (except for
holdings in debt securities, which are out of scope of the guidance). Also, the
reference to an investment grade rating in the standard is only given as an
example of a low credit risk exposure. An investment grade rating given by a
rating agenda cannot automatically be considered low credit risk because
banks are expected to rely primarily on their own credit assessments.
c.
Delinquency is a lagging indicator. Therefore, the Committee expects banks
not to use the more-than-30-days-past-due rebuttable presumption as a
primary indicator of a significant increase in credit risk. Banks may only use
the rebuttable presumption as a backstop measure, alongside other, earlier
indicators, while any rebuttal of the presumption would have to be
accompanied by a thorough analysis to show that 30 days past due is not
correlated with a significant increase in credit risk.33
7.2
Global Public Policy Committee (GPPC) guidance
On 17 June 2016, the GPPC published The implementation of IFRS 9 impairment by
banks – Considerations for those charged with governance of systemically important
banks (‘the GPPC guidance’). The GPPC is the Global Public Policy Committee of
representatives of the six largest accounting networks. This publication was issued to
promote high-quality implementation of the accounting for ECLs in accordance with
IFRS and to help those charged with governance to identify the elements of a high-
quality implementation. It was designed to complement other guidance such as that
issued by the Basel Committee (see 7.1 above) and the EDTF (see Chapter 50 at 9.2). It
does not purport to amend or interpret the requirements of IFRS 9 in any way. The first
half of the GPCC guidance sets out key areas of focus for those charged with
governance. This includes governance and controls, transition issues and ten questions
that those charged with governance might wish to discuss. The second half of the
guidance sets out a sophisticated approach to implementing each aspect of the
requirements of IFRS 9, along with considerations for a simpler approach and what is
Financial instruments: Impairment 3823
not compliant. Where relevant to understanding the accounting requirements of IFRS 9,
this guidance is reflected in this chapter.
The GPPC guidance regards determination of the level of sophistication of the approach
to be used as one of the key areas of focus for those charged with governance.
Consequently, it provides guidance on how to make this determination for particular
portfolios. It sets out factors to consider at the level of the entity, such as the extent of
systemic risk that the bank poses, whether it is listed or a public interest entity, the size
of its balance sheet and off balance sheet credit exposures, and the level and volatility
of historical credit losses. Portfolio-level factors include its size relative to that of the
total balance sheet and its complexity, the sophistication of other lending-related
modelling methodologies, the extent of available data, the level of historical losses and
the level and volatility of losses expected in the future. The document stresses that a
simpler approach is not necessarily a lower quality approach if it is applied to an
appropriate portfolio.
Also, on 28 July 2017, the GPPC issued its second paper titled The Auditor’s Response
to the Risks of Material Misstatement Posed by Estimates of Expected Credit Losses
under IFRS 9. This second paper was written in an effort to assist audit committees in
their oversight of the bank’s auditors with regard to auditing ECLs. It is addressed
primarily to the audit committees of systemically-important banks (SIBs) because of the
relative importance of SIBs to capital markets and global financial stability but is
relevant for other banks as well. It should be read in conjunction with the initial
guidance published in 2016.
7.3
Measurement dates of expected credit losses
7.3.1
Date of derecognition and date of initial recognition
Impairment must be assessed and measured at the reporting date. IFRS 9 also requires
a derecognition gain or loss to be measured relative to the carrying amount at the date
of derecognition (see Chapter 50 at 4.2.1 and 7.1.1). This necessitates an assessment and
measurement of ECLs for that particular asset as at the date of derecognition, as was
confirmed by the discussions at the April 2015 ITG meeting. Essentially, the calculation
of derecognition gains or losses is a two-step process:
• Step 1: ECLs are remeasured at the date of derecognition and presented in the
separate impairment line item in the statement of profit or loss as per
paragraph 82(ba) of IAS 1– Presentation of Financial Statements. The change in
ECL estimate should still reflect the reporting entity’s view rather than the market’s
view of credit losses based upon the remaining contractual life of the financial
asset. Also, the residual life of the asset should not be deemed to be nil because of
the imminent sale and impairment losses that have not materialised should not be
mechanically reversed to reflect the fact that the reporting entity will no longer be
holding the debt security. This is consistent with Illustrative Examples 13 and 14 of
IFRS 9. In particular, a footnote to the last journal entry in Illustrative Example 14
explains that the loss on sale includes the accumulated impairment amount.
• Step 2: Gains or losses on derecognition are calculated taking into account all ECLs
for financial assets measured at amortised cost and all cumulative gains or losses
3824 Chapter 47
previously recognised in other comprehensive income including those related to
ECLs for financial assets measured at fair value through other comprehensive
income. Unlike the requirement to present gains and losses arising from the
derecognition of financial assets measured at amortised cost as a separate line item
in the statement of profit or loss as per paragraph 82(aa) of IAS 1, there is no
specific presentation requirement for financial assets measured at fair value
through other comprehensive income.
Since that discussion, the ITG has discussed whether the expected sales of impaired
assets should be reflected in the calculation of ECLs (see 5.8.2 above). Given their
conclusion that an entity should, it is quite possible that there will be little or no
additional losses to record on derecognition that have not already been reflected in the
impairment cost.
A similar issue is whether impairment needs to be measured at the date that an asset is
modified (see 8 below).
At the April 2015 meeting, the ITG also discussed a more diffic
ult question, whether
impairment must be measured as at the date of initial recognition for foreign currency
monetary assets. The significance of this is whether subsequent gains and losses arising
from foreign currency retranslation in the first accounting period should be calculated
based on the initial gross amortised cost or a net amount, after deducting an impairment
allowance. This would affect the allocation of subsequent gains and losses of the asset
in this period to impairment or to foreign currency retranslation, so that it would be
reported in different lines of the profit or loss account.
Differing views were expressed:
• A few ITG members supported the view that while IFRS 9 does not expressly
require ECLs to be measured at the date of initial recognition, the requirements of
other IFRSs, e.g. IAS 21 – The Effects of Changes in Foreign Exchange Rates, may
result in an entity measuring ECLs at the date of initial recognition. Also,
Illustrative Example 14 in IFRS 9 implies the need to include ECLs on initial
recognition in the measurement of foreign exchange gains and losses in respect of
a foreign currency-denominated asset (see Example 47.20 at 9.2 below). However,
these members questioned the frequency with which an entity needed to perform
that calculation and pointed out that considerations of materiality would be a key
factor in making this decision.
• Some other ITG members were of the view that an entity is required to measure a
financial asset at its fair value upon initial recognition and that consequently
measuring ECLs at initial recognition would be inconsistent with that requirement.
[IFRS 9.5.1.1]. IFRS 9 includes impairment as part of the subsequent measurement of
a financial asset and, consequently, only requires an entity to begin measuring
ECLs at the first reporting date after initial recognition (or on derecognition if that
occurs earlier). [IFRS 9.3.2.12, 9.5.5.3, 9.5.5.5, 9.5.5.13]. While the requirements of other
IFRSs should be applied to the loss allowance at that point, the application of those
requirements should not result in an entity having to measure ECLs at a date earlier
than that specifically required by IFRS 9.
Financial instruments: Impairment 3825
The ITG also noted that the illustrative examples are non-authoritative and illustrate
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