International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 760
€45,000
1-30 days past due
€7,500,000
€120,000
31-60 days past due
€4,000,000
€144,000
61-90 days past due
€2,500,000
€165,000
More than 90 days past due
€1,000,000
€106,000
€30,000,000
€580,000
It should be noted that this example, like many in the standard, ignores the need to
consider explicitly the time value of money, presumably in this case because the effect
is considered immaterial.
10.2 Lease
receivables
For lease receivables, entities have a policy choice to apply either the general approach
(see 3.1 above) or the simplified approach (see 3.2 above) separately to finance and
operating lease receivables (see Chapter 23 and Chapter 24). [IFRS 9.5.5.15(b)].
When measuring ECLs for lease receivables, an entity should:
• use the cash flows that are used in measuring the lease receivables in accordance
with IAS 17 or IFRS 16 (when applied); [IFRS 9.B5.5.34] and
• discount the ECLs using the same discount rate used in the measurement of the lease
receivables in accordance with IAS 17 or IFRS 16 (when applied). [IFRS 9.B5.5.46, IAS 17.4].
There has been some discussion on whether the unguaranteed residual value (URV) of the
asset subject to a finance lease should be included in the calculation of ECLs under IFRS 9.
The URV is part of the gross investment in the finance lease, together with the minimum
lease payments receivable by the lessor. Changes to URV arise from fluctuations in the price
that could be received for the leased asset at the end of the lease term. Paragraph 2.1(b) of
IFRS 9 scopes out rights and obligations under leases to which IAS 17 applies, except for the
impairment of finance lease receivables (i.e. net investments in finance leases) and operating
lease receivables recognised by a lessor (see 2 above). Furthermore, IAS 17 does not provide
guidance on impairment of lease receivables as this is subject to IFRS 9. However, IAS 17
and IFRS 16 (when applied) provide guidance on measurement of the URV, which means
that such measurement is within the scope of IAS 17 or IFRS16 (when applied) rather than
the impairment requirements of IFRS 9. [IAS 17.41, IFRS 16.77].
The URV of the asset underlying a finance lease should be excluded from the calculation
of ECLs under IFRS 9. This means that the collateral that is taken into account in
measuring ECLs should exclude any amounts attributed to URV and recorded on the
lessor’s statement of financial position.
In other words, any collateral taken into account in the calculation of ECLs should be
restricted to the fair value of the right of use of the asset and not that of the underlying
asset itself.
11
LOAN COMMITMENTS AND FINANCIAL GUARANTEE
CONTRACTS
The description of ‘loan commitment’ and the definition of ‘financial guarantee contract’
remain unchanged from IAS 39. Loan commitments (see Chapter 41 at 3.5) are described in
3840 Chapter 47
IFRS 9 as ‘firm commitments to provide credit under pre-specified terms and conditions’,
while a financial guarantee contract (see Chapter 41 at 3.4) is defined as ‘a contract that
requires the issuer to make specified payments to reimburse the holder for a loss it incurs
because a specified debtor fails to make payment when due in accordance with the original
or modified terms of a debt instrument’. [IFRS 9.BCZ2.2, Appendix A, IAS 39.9, BC15].
The IFRS 9 impairment requirements apply to loan commitments and financial
guarantee contracts that are not measured at fair value through profit or loss under
IFRS 9, with some exceptions (see 2 above).
The ITG (see 1.5 above) discussed in April 2015 whether the impairment requirements
in IFRS 9 must also be applied to other commitments to extend credit such as:
• a commitment (on inception of a finance lease) to commence a finance lease at a date
in the future (i.e. a commitment to transfer the right to use an asset at the lease
commencement date in return for a payment or series of payments in the future); and
• a commitment by a retailer through the issue of a store account to provide a customer
with credit when the customer buys goods or services from the retailer in the future.
The ITG appeared to agree with the IASB’s staff analysis that the impairment
requirements of IFRS 9 apply to an agreement that contains a commitment to extend
credit by virtue of paragraph 2.1(g) if:
• the agreement meets the description of a loan commitment; [IFRS 9.BCZ2.2]
• the agreement meets the definition of a financial instrument; [IAS 32.11] and
• none of the specific exemptions from the requirements of IFRS 9 apply. [IFRS 9.2.1].
The IASB staff paper stated that some contracts, such as irrevocable finance lease
agreements, might clearly contain a firm commitment at inception to provide credit under
pre-specified terms and conditions. However, other cases might not be so clear cut,
depending upon the specific terms of the agreement and other facts and circumstances
(e.g. if the issuer of a store account has the discretion to refuse to sell products or services
to a customer with a store card and hence can avoid extending credit).35
In the examples discussed above, the finance lease and store account do not meet the
definition of a financial instrument until the contractual right to receive cash is
established, that is likely to be at the commencement of the lease term or when goods
or services are sold. [IAS 32.11, AG20]. Only lease receivables are scoped into the IFRS 9
impairment requirements (see 10.2 above). [IFRS 9.2.1(b)]. Consequently, there is no need
to make provision for ECLs, in accordance with IFRS 9, until a financial lease receivable
or a financial asset within the scope of IFRS 9 is recognised.
The application of the model to financial guarantees and loan commitments warrants
some further specification regarding some of the key elements, such as the
determination of the credit quality on initial recognition, cash shortfalls and the EIR to
be used in the ECL calculations. These specifications are summarised in Figure 47.6
below, which also highlights the differences in recognising and measuring ECLs for
financial assets measured at amortised cost or at fair value through other comprehensive
income, loan commitments and financial guarantee contracts.
Financial instruments: Impairment 3841
Figure 47.6
Summary of the application of the ECL model to loan
commitments and financial guarantee contracts
Financial assets measured
Loan commitments
Financial guarantee
at amortised cost or at fair
contracts
value through other
comprehensive income
Date of initial
Trade date. [IFRS 9.5.7.4].
Date that an entity
Date that an entity
recognition in
becomes a party to the
becomes a party to the
applying the
irrevocable commitment.
irrevocable commitment.
impairment
[IFR
S 9.5.5.6].
[IFRS 9.5.5.6].
requirements
(see 7.3.1 above)
Period over which The expected life up to
The expected life up to the The expected life up to
to estimate ECLs
the maximum contractual
maximum contractual
the maximum contractual
(see 5.5 above)
period (including
period over which an
period over which an
extension options at the
entity has a present
entity has a present
discretion of the
contractual obligation to
contractual obligation to
borrower) over which the
extend credit.
extend credit.
entity is exposed to credit
[IFRS 9.B5.5.38].
[IFRS 9.B5.5.38].
risk and not a longer
period. [IFRS 9.5.5.19].
However, for revolving
credit facilities (see 12
below), this period extends
beyond the contractual
period over which the
entity is exposed to credit
risk and the ECLs would
not be mitigated by credit
risk management actions.
[IFRS 9.5.5.20, B5.5.39,
B5.5.40].
Cash shortfalls in
Cash shortfalls between
Cash shortfalls between
Cash shortfalls are the
measuring ECLs
the cash flows that are due the contractual cash flows
expected payments to
(see 5.2 above)
to an entity in accordance
that are due to the entity if
reimburse the holder for a
with the contract and the
the holder of the loan
credit loss that it incurs
cash flows that the entity
commitment draws down
less any amounts that the
expects to receive.
the loan and the cash flows entity (issuer) expects to
[IFRS 9.B5.5.28].
that the entity expects to
receive from the holder,
receive if the loan is drawn the debtor or any other
down. [IFRS 9.B5.5.30].
party. [IFRS 9.B5.5.32].
EIR used in
The EIR is determined or
The EIR of the resulting
The current rate
discounting ECLs approximated at initial
asset will be applied and
representing the risk of
(see 5.7 above)
recognition of the
if this is not determinable, the cash flows is used.
financial instrument.
then the current rate
[IFRS 9.B5.5.48].
[IFRS 9.B5.5.44].
representing the risk of
the cash flows is used.
[IFRS 9.B5.5.47, B5.5.48].
Assessment of
An entity considers
An entity considers
An entity considers the
significant
changes in the risk of a
changes in the risk of a
changes in the risk that
increases in credit default occurring on the
default occurring on the
the specified debtor will
risk (see 6 above)
financial asset.
loan to which a loan
default on the contract.
[IFRS 9.5.5.9].
commitment relates.
[IFRS 9.B5.5.8].
[IFRS 9.B5.5.8].
3842 Chapter 47
At its meeting in April 2015, the ITG (see 1.5 above) also discussed the measurement of
ECLs for an issued financial guarantee contract that requires the holder to pay further
premiums in the future. Some members of the ITG agreed with the staff’s analysis that
the issuer of a financial guarantee contract should exclude future premium receipts due
from the holder when measuring ECLs in respect of the expected cash outflows payable
under the guarantee.36 When estimating the cash shortfalls, the amounts that the entity
expects to receive from the holder should relate only to recoveries or reimbursements
of claims for losses and would not include receipts of premiums. [IFRS 9.B5.5.32].
Moreover, the expected cash outflows under the guarantee depend upon the risk of
default of the guaranteed asset, while the expected future premiums receipts are subject
to the risk of default by the holder of the guarantee. Hence, these risks of default should
be considered separately. In other words, the ECL measurement should be carried out
gross of any premiums receivable in the future.
In addition, an ITG member noted that the terms of a financial guarantee contract may
affect the period of exposure to credit risk on the guarantee, for example if the
guarantee were contingent or cancellable. This should be taken into consideration when
measuring the ECLs of the guarantee.
IFRS 9 requires that financial guarantees and off-market loan commitments should be
measured at the ‘higher of’ the amount initially recognised less cumulative amortisation,
and the ECL. [IFRS 9.4.2.1(c), 4.2.1(d)]. For a financial guarantee contract issued to an unrelated
party in a stand-alone arm’s length transaction, premiums that are received in full at
inception will likely be the same as the fair value of the guarantee at initial recognition
(see Chapter 45 at 3.3.3). In such circumstances, it is likely that no ECLs will need to be
recognised immediately after initial recognition, as the initial fair value will normally
exceed the lifetime ECLs. However, a financial guarantee contract for which premiums
are receivable over the life of the guarantee will have a nil fair value at initial recognition.
In such circumstances, the subsequent measurement of the financial guarantee contract
is likely to be based on the ECL allowance. This is illustrated in the example below.
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
Scenario 1: On 1 January 2019, Bank A issues a 5 year financial guarantee of a loan with a nominal value of
£2,000,000 with 5% interest, with the full premium of £100,000 receivable upfront at contract
inception. This premium is recognised on a straight line basis over the life of the guarantee. As
at 31 December 2021 and 2022, Bank A assesses that there has been a significant increase in
credit risk of the financial guarantee contract and as at 31 December 2023, the debtor defaults
and fails to make payments in accordance with the terms of the debt instrument. The lifetime
ECLs estimated as at 31 December 2019 and 2020 are £75,000 and £55,000 respectively, with a
significant increase in 2021 and 2022 to £200,000 and £500,000, respectively, and for the
guaranteed amount of £2,100,000 (being the principal and unpaid interest) in 2023 when the
debtor defaults. The 12-month ECLs are £18,000 and £25,000 as at 31 December 2019 and 2020.
Scenario 2: Same facts as in Scenario 1 except that Bank B issues a 5 year financial guarantee of a loan
with a nominal value of £2,000,000, with premiums receivable over the life of the guarantee
of £20,000 each year, payable on 31 December 2019, 2020, 2021, 2022 and 2023, i.e. a total
of £100,000. The fair value of the guarantee is ni
l at origination. If a claim is paid out under
the financial guarantee contract, Bank B will lose the right to receive future premiums.
Financial instruments: Impairment 3843
31
Dec
31 Dec
31 Dec
31 Dec
31 Dec
2019
2020
2021
2022
2023
Scenario 1: Full premium receivable
at inception
Initial fair value is £100,000
Fair value less cumulative income
£80,000 £60,000 £40,000 £20,000
–
recognised*
ECLs
£18,000
£25,000
£200,000
£500,000
£2,100,000
Recorded value: higher of (a) or (b) in
£80,000 £60,000 £200,000
£500,000 £2,100,000
accordance with IFRS 9.4.2.1(c)
Scenario 2: Premium receivable over
£20,000 £20,000 £20,000 £20,000
£20,000
the life of contract
Initial fair value is £0 in accordance
with IFRS 9.5.1.1
(a) Fair value less cumulative
– – – –
–
income recognised*
(b) ECLs
£18,000
£25,000
£200,000
£500,000
£2,100,000
Recorded value: higher of (a) or (b) in
£18,000
£25,000
£200,000
£500,000
£2,100,000
accordance with IFRS 9.4.2.1(c)
* Based on the assumption of a straight-line amortisation of premiums received over the life of the financial guarantee.
Before there has been a significant increase in credit risk in 2019 and 2020, in Scenario 1, the measurement
of the financial guarantee is based on the fair value, less cumulative income recognised in accordance with
IFRS 15 whilst, in Scenario 2, the measurement is based on the ECL allowance. However, once there has
been a significant increase in credit risk, the measurement of the financial guarantee is based on the ECL
allowance in both scenarios. Consequently, the timing of receipt of premiums may have a significant effect
on the measurement of the guarantee particularly when there has not been a significant increase in credit risk.
Although the accounting treatment in Scenario 2 in the example above may seem unintuitive, in that the
guarantor must initially recognise ECLs even though it expects to receive future premium income, it is