LGD of FC60,000). The latter loss is discounted by the 5 per cent EIR and weighted by the 2 per cent PD to
arrive at the loss allowance. The table below shows the ECL calculation:
1 January 2019 (values in FC)
Year 1
Year 2
Year 3
Year 4
Year 5
Contractual cash flows
5,000
5,000 5,000 5,000
105,000
Expected cash flows
45,000
Expected cash shortfalls
40,000
(5,000)
(5,000)
(5,000) (105,000)
NPV at 5%
(57,143)
PD 2%
Net present value (probability
weighted) – this is the ECL
(1,143)
In accordance with paragraph 16A of IFRS 7, the loss allowance for financial assets measured at fair value
through other comprehensive income is not presented separately as a reduction of the carrying amount of the
financial asset. As a consequence, the offsetting entry to the impairment loss of LC1,143 is recorded in other
comprehensive income in the same period.
Situation as at 31 December 2019
As of 31 December 2019 (the reporting date), the entity observes the following facts:
• The fair value of the bond has decreased from FC100,000 to FC96,370, mainly because of an increase
in market interest rates.
Financial instruments: Impairment 3835
• The fair value of the swap has increased to FC1,837.
• In addition, as at 31 December 2019, the entity determines that there has been no change to the credit
risk on the bond since initial recognition. The entity still estimates the PD over the next 12 months
at 2 per cent and the LGD at FC60,000, resulting in an (undiscounted) expected shortfall of FC1,200.
• As at 31 December 2019, the exchange rate is FC1 to LC1.4.
The table below illustrates the amounts recognised in the financial statements between 1 January 2019 (after the
entries for the impairment loss of FC1,143 at 1 January, shown above) and 31 December 2019, as well as the shadow
amortised cost calculation for the bond (debits are shown as positive numbers and credits as negative numbers):
Financial Statements
Shadow Calculation
FC
LC
FC
LC
Statement of financial
position
Bond (FV)
96,370
134,918
Gross carrying amount
100,000 140,000
Swap (FV)
1,837
2,572
Loss allowance
(1,143)
(1,600)
Amortised
cost
98,857 138,400
Statement
of
profit or loss
Impairment
–
–
FV hedge adjustment
(1,837) (2,572)
FV hedge (bond)
1,837
2,572
Adjusted gross carrying
98,163 137,428
amount
FX gain/loss (bond)
(39,543)
Adjusted amortised cost
97,020 135,828
FV hedge (swap)
(1,837)
(2,572)
FX gain/loss (swap)
–
–
Statement of OCI
FV changes
3,630
4,625
Impairment offset
–
–
FV hedge adjustment (1,837)
(2,572)
Because the entity have maintained the expected cash shortfall pattern and its probability of occurring, the
change in estimate is just the effect of deferral by a year of the expected date of default, which exactly offsets
the unwinding of the discount.
The bond is a monetary asset. Consequently, the entity recognises the changes arising from movements in
foreign exchange rates in profit or loss in accordance with paragraphs 23(a) and 28 of IAS 21 and recognises
other changes in accordance with IFRS 9. For the purposes of applying paragraph 28 of IAS 21, the asset is
treated as an asset measured at amortised cost in the foreign currency.
The change in the fair value of the bond since 1 January 2019 amounts to LC34,918 and is recognised as a
fair value adjustment to the carrying amount of the bond on the entity’s statement of financial position.
The gain of LC39,543 due to the changes in foreign exchange rates is recognised in profit or loss. It consists
of the impact of the change in the exchange rates during 2019:
• on the original gross carrying amount of the bond, amounting to LC40,000;
• offset by the loss allowance of the bond, amounting to LC457 (i.e. the difference of FC1,143 translated
at the exchange rate as at 1 January 2019 of FC1 to LC1 and FC1,143 translated at the exchange rate as
at 31 December 2019 of FC1 to LC1.4).
The difference between the change in fair value (LC34,918) and the gain recognised in profit or loss that is due
to the changes in foreign exchange rates (LC39,543) is recognised in OCI. That difference amounts to LC4,625.
A gain of LC2,572 (FC1,837) on the swap is recognised in profit or loss and, because it is assumed that there
is no hedge ineffectiveness, this amount coincides with the loss on the hedged item. Illustrative Example 14
of IFRS 9 seems to suggest that the hedging gain or loss of a debt instrument at fair value through other
3836 Chapter 47
comprehensive income is recycled from other comprehensive income in the same period but, since
paragraph 6.5.8(b) of IFRS 9 requires the hedging gain or loss on the hedged item to be recognised in profit
or loss and the offsetting entry is to OCI, this is not strictly ‘recycling’.
Situation as at 31 December 2020
As of 31 December 2020 (the reporting date), the entity observes the following facts:
• The fair value of the bond has further decreased from FC96,370 to FC87,114.
• The fair value of the swap has increased to FC2,092.
• Based on adverse macroeconomic developments in the industry in which the bond issuer operates, the
entity assumes a significant increase in credit risk since initial recognition, and recognises the lifetime
ECL for the bond.
• The entity updates its impairment estimate and now estimates the lifetime PD at 20 per cent and the LGD
at FC48,500, resulting in (undiscounted) expected cash shortfalls of FC9,700. (For simplicity, this
example assumes that payment default will happen on maturity when the entire face value becomes due).
• As at 31 December 2020, the exchange rate is FC1 to LC1.25.
The table below illustrates the amounts recognised in the financial statements between 31 December 2019
and 31 December 2020, as well as the shadow amortised cost calculation for the bond (debits are shown as
positive numbers and credits as negative numbers):
Financial Statements
Shadow Calculation
FC
LC
FC
LC
Statement of financial
position
Bond (FV)
87,114
108,893
Gross carrying amount
100,000 125,000
Swap (FV)
2,092
2,615
Loss allowance
(8,379)
(10,474)
&nb
sp; Amortised
cost
91,621 114,526
Statement
of
profit or loss
Impairment
7,236
9,045
FV hedge adjustment
(2,092) (2,615)
FV hedge (bond)
255
319
Adj. gross carrying amt.
97,908
122,385
FX gain/loss (bond)
14,553
Adj. amortised cost
89,529 111,911
FV hedge (swap)
(255)
(319)
FX gain/loss (swap)
276
Statement of OCI
FV changes
9,256
11,472
Impairment offset (7,236)
(9,045)
FV hedge adjustment (255)
(319)
The table below illustrates the ECL calculation:
31 December 2019 (values in FC)
Year 3
Year 4
Year 5
Contractual cash flows
5,000
5,000
105,000
Expected cash flows 5,000
5,000
56,500
Expected cash shortfalls
–
– (48,500)
NPV at 5.8%
(41,896)
PD 20%
Net present value (probability weighted)
– this is the ECL
(8,379)
Financial instruments: Impairment 3837
Again, the table above shows how the ECL is calculated as the net present value of the cash shortfalls, i.e.
the difference between contractual and expected cash flows on each relevant date. The offsetting entry of the
impairment loss FC7,236 (LC9,045) is recorded in other comprehensive income in the same period.
The change in the fair value of the bond since 31 December 2019 amounts to a decrease of LC26,026 and
is recognised as a fair value adjustment to the carrying amount of the bond on the entity’s statement of
financial position.
The loss of LC14,553 due to the changes in foreign exchange rates is recognised in profit or loss. It consists
of the impact of the change in the exchange rates during 2019:
• on the original gross carrying amount of the bond, amounting to a loss of LC15,000;
• on the loss allowance of the bond, amounting to a gain of LC171;
• on the fair value hedge adjustment, amounting to a gain of LC276.
The difference between the change in fair value (decrease of LC26,026) and the loss recognised in profit or
loss that is due to the changes in foreign exchange rates (–LC14,553) is recognised in OCI.
A gain of LC319 (FC255) on the swap is recognised in profit or loss and, because it is assumed that there is
no hedge ineffectiveness, this amount coincides with the loss on the hedged item.
Situation as at 1 January 2021
On 1 January 2021, the entity decides to sell the bond for FC87,114, which is its fair value at that date and
also closes out the swap at its fair value. For simplicity, all amounts, including the foreign exchange rate, are
assumed to be the same as at 31 December 2020.
Upon derecognition, the entity reclassifies the cumulative amount recognised in OCI of (LC3,018)
((FC2,415)) to profit or loss. This amount is equal to the difference between the fair value and the adjusted
amortised cost amount of the bond, including the fair value hedge adjustment at the time of its derecognition.
The table below presents a reconciliation of those amounts.
Reconciliation of loss on derecognition (values in LC) to cumulative OCI
Fair value per 1 January 2021
108,893
Adjusted amortised cost per
111,911
1 January 2021
Loss (3,018)
Cum. OCI
1 January
31 December
31 December
2019
2019
2020
FV changes
16,097
–
4,625 11,472
Impairment
(10,188)
(1,143)
– (9,045)
FV hedge adjustment
(2,891)
–
(2,572) (319)
Total OCI to be reclassified
3,018
This table presents the amount that has not yet been recycled and, therefore, must be reclassified to profit or
loss on derecognition.
10
TRADE RECEIVABLES, CONTRACT ASSETS AND LEASE
RECEIVABLES
The standard provides some operational simplifications for trade receivables, contract
assets and lease receivables. These are the requirement or policy choice to apply the
simplified approach that does not require entities to track changes in credit risk (see 3.2
above) and the practical expedient to calculate ECLs on trade receivables using a
provision matrix (see 10.1 below).
3838 Chapter 47
10.1 Trade receivables and contract assets
It is a requirement for entities to apply the simplified approach for trade receivables or
contract assets that do not contain a significant financing component. However, entities
have a policy choice to apply either the general approach (see 3.1 above) or the
simplified approach separately to trade receivables and contract assets that do contain
a significant financing component (see 3.2 above). [IFRS 9.5.5.15(a)].
Also, entities are allowed to use practical expedients when measuring ECLs, as long as
the approach reflects a probability-weighted outcome, the time value of money and
reasonable and supportable information that is available without undue cost or effort at
the reporting date about past events, current conditions and forecasts of future
economic conditions. [IFRS 9.5.5.17, B5.5.35].
One of the approaches suggested in the standard is the use of a provision matrix as a
practical expedient for measuring ECLs on trade receivables. For instance, the provision
rates might be based on days past due (e.g. 1 per cent if not past due, 2 per cent if less than
30 days past due, etc.) for groupings of various customer segments that have similar loss
patterns. The grouping may be based on geographical region, product type, customer
rating, the type of collateral or whether covered by trade credit insurance, and the type
of customer (such as wholesale or retail). To calibrate the matrix, the entity would adjust
its historical credit loss experience with forward-looking information. [IFRS 9.B5.5.35].
In practice, many corporates use a provision matrix to calculate their current
impairment allowances. However, in order to comply with the IFRS 9 requirements,
corporates have needed to consider how current and forward-looking information
might affect their customers’ historical default rates and, consequently, how the
information would affect their current expectations and estimates of ECLs. The use of
the provision matrix is illustrated in the following example. [IFRS 9 IG Example 12, IE74-IE77].
Example 47.21: Provision matrix
Company M, a manufacturer, has a portfolio of trade receivables of €30 million in 2019 and operates only in
one geographical region. The customer base consists of a large number of small clients and the trade receivables
are categorised by common risk characteristics that are representative of the customers’ abilities to pay all
a
mounts due in accordance with the contractual terms. The trade receivables do not have a significant financing
component in accordance with IFRS 15. In accordance with paragraph 5.5.15 of IFRS 9, the loss allowance for
such trade receivables is always measured at an amount equal to lifetime ECLs.
To determine the ECLs for the portfolio, Company M uses a provision matrix. The provision matrix is based on its
historical observed loss rates over the expected life of the trade receivables and is adjusted for forward-looking
estimates. At every reporting date, the historical observed loss rates are updated and changes in the forward-looking
estimates are analysed. In this case it is forecast that economic conditions will deteriorate over the next year.
On that basis, Company M estimates the following provision matrix:
Current 1-30
days
31-60 days
61-90 days
More than
past due
past due
past due
90 days
past due
Loss rate
0.3%
1.6%
3.6%
6.6%
10.6%
The trade receivables from the large number of small customers amount to €30 million and are measured
using the provision matrix.
Financial instruments: Impairment 3839
Gross carrying amount
Lifetime ECL allowance
(Gross carrying amount × lifetime ECL rate)
Current
€15,000,000
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 759
