• quantitative information that will assist users to understand any subsequent
increase in credit risk, including information about modified financial assets
for which the loss allowance has reverted from 12-month ECLs to lifetime
ECLs; [IFRS 7.35F(f), B8B, 35J]
• the entity’s credit risk exposure and significant credit risk concentrations, including
the gross carrying amount of financial assets and the exposure to credit risk on loan
commitments and financial guarantee contracts, by credit risk rating grades or past
due status. This disclosure is required to be shown separately for:
• those instruments that are measured using 12-month ECLs;
• those that are measured using lifetime ECLs;
• financial assets that are credit-impaired on initial recognition;
• those that are subsequently credit-impaired;
• trade receivables, contract assets and lease receivables measured under the
simplified approach; [IFRS 7.35M, B8H, B8I] and
• the write-off policy and amounts written off during the period that are still subject
to enforcement activity (see 14.1.1 above). [IFRS 7.35F(e), 35L].
Financial instruments: Impairment 3869
It is critical for entities to align their credit risk management and financial reporting systems
and processes, not only to estimate the loss allowance for ECLs, but also to produce a
sufficient level of detailed information to meet the disclosure requirements in IFRS 7.
In addition, the EDTF has developed common ECL disclosure practices (see Chapter 50
at 9.2).
16
EFFECTIVE DATE AND TRANSITION
This section covers the effective date and transition issues specific to impairment. For
other transition provisions related to IFRS 9, please refer to Chapter 44 at 10.2,
Chapter 46 at 5.2 and Chapter 49 at 13.3.
16.1 Effective
date
IFRS 9 is effective for annual periods beginning on or after 1 January 2018.
Previously, the IASB moved the mandatory effective date of IFRS 9 from annual periods
beginning on or after 1 January 2013 to 1 January 2015. Its later decision to defer the
mandatory effective date to annual periods beginning on or after 1 January 2018, was
intended to allow sufficient time for entities to develop systems and processes and to
gather historical data in order to make the calculations.
16.2 Transition
IFRS 9 contains a general requirement that it should be applied retrospectively,
including the impairment requirements. However, the standard does specify a number
of exceptions and reliefs. [IFRS 9.7.2.1, 7.2.15, 7.2.17]. These are covered below.
16.2.1
Restatement of comparatives
Notwithstanding the general requirement to apply the standard retrospectively, perhaps
the most important transitional relief is that IFRS 9 does not require restatement of prior
periods. Indeed, an entity is permitted to restate prior periods only if it is able to do so
without the use of hindsight. [IFRS 9.7.2.15].
The IASB noted that as entities were not required to recognise or disclose ECLs for
accounting purposes in the past, there was a risk that hindsight would be needed to
recognise and measure the amount of ECLs in prior periods. [IFRS 9.BC7.75(b)]. This applies
to situations where it is impracticable to calculate the period-specific effect or the
cumulative effect of the change and hence, it is impossible for entities to objectively
distinguish the historical information that is relevant for estimating ECLs from the
information that would not have been available at that earlier date. [IFRS 9.BC7.74,
IAS 8.50-53].
It should be stressed that other IFRS transition requirements, such as the requirement that
the business model should be assessed as at the date of initial application and that the
application is not retrospective for assets derecognised prior to that date, may mean that
comparative information may not, in any case, be very meaningful. To the extent financial
assets were held during any prior periods but were sold before the date of initial application,
their impairment will be measured under IAS 39 if comparative information is restated.
3870 Chapter 47
We are aware that some banks are considering providing pro forma comparative
impairment information in their annual report in the year of initial application as if
IFRS 9 were applied to all financial assets throughout the comparative period. Such
entities will need to make it clear that these do not represent comparative numbers
according to IFRS 9.
If an entity is required to provide comparative information for two prior periods (e.g.
US Foreign Private Issuers as required by the US Securities Exchange Commission), we
believe that the requirement in paragraph 7.2.15 of IFRS 9 does not represent an all-or-
nothing option, i.e. if the entity can only restate the latest comparative period without
the use of hindsight but would need to use hindsight to restate the earlier comparative
period, this does not preclude a restatement only of the latest comparative period.
Therefore, the entity could choose to restate the latest comparative period for which
the financial information does not involve the use of hindsight, while it would not restate
the earlier comparative period for which the use of hindsight would be involved. Such
circumstances may arise if the entity has chosen to do a parallel run for impairment only
a year before the mandatory application date of IFRS 9, in which case they would be
able to restate the latest comparative period without the use of hindsight but may not
be able to do so for the earlier period. The same applies to any other information about
prior periods, such as historical summaries of financial data. This treatment is consistent
with the requirements in IAS 8 where for retrospective application of a new accounting
policy, an entity need to only go back to the beginning of the earliest period for which
retrospective applicable is practicable. [IAS 8.24, 25, 26, IFRS 9.BC7.13].
When prior periods are not restated, any difference between the previously reported
carrying amounts and the new carrying amounts of financial instruments at the
beginning of the annual reporting period that includes the date of initial application must
be recognised in the opening retained earnings (or other component of equity, as
appropriate) of the annual reporting period that includes the date of initial application.
However, if an entity restates prior periods, the restated financial statements must
reflect all of the requirements in the standard. [IFRS 9.7.2.15]. For impairment purposes,
the cumulative impairment loss allowance is recognised in the opening retained
earnings for all credit exposures.
When interim financial reports are prepared in accordance with IAS 34 – Interim
Financial Reporting, the requirements in IFRS 9 need not be applied to interim periods
prior to the date of initial application if it is impracticable (as defined in IAS 8).
[IFRS 9.7.2.16].
16.2.2
Initial credit risk and significant increases in credit risk on transition
At the date of initial application, in order to determine the loss allowance that would be
recognised under the IFRS 9 impairment requirements, an enti
ty is required to
determine whether there has been a significant increase in credit risk since initial
recognition, by comparing: [IFRS 9.7.2.18, IFRS 1.B8E]
• the credit risk at the date that a financial instrument was initially recognised (or for
loan commitments and financial guarantee contracts, at the date that the entity
became a party to the irrevocable commitment); and
• the credit risk at the date of initial application of IFRS 9.
Financial instruments: Impairment 3871
On transition, the standard allows an entity to approximate the credit risk on initial
recognition of the financial instrument (or for loan commitments and financial guarantee
contracts the date that the entity became a party to the irrevocable commitment), by
considering all reasonable and supportable information that is available without undue
cost or effort (see 5.9.1 above). [IFRS 9.7.2.18, B7.2.2, IFRS 1.B8E]. An entity may consider
internal and external information, including information used for collective assessment
(see 6.5 above) and information about similar products or peer group experience for
comparable financial instruments. [IFRS 9.B7.2.3, B7.2.4]. When determining whether there
have been significant increases in credit risk since initial recognition, an entity is not
required to undertake an exhaustive search for information. [IFRS 9.B7.2.2].
In addition, when determining whether there has been a significant increase in credit
risk since initial recognition, an entity may use the low credit risk operational
simplification (see 6.4.1 above) or the more than 30 days past due rebuttable
presumption if significant deterioration is assessed solely based on delinquency
(see 6.4.2 above). [IFRS 9.7.2.19]. The IASB also noted that an entity can assess the change
in the credit risk of a financial instrument on a portfolio basis if the initial credit risk is
not determinable for an individual financial instrument (see 6.5 above). [IFRS 9.BC7.81].
If an entity is unable to determine whether there have been significant increases in
credit risk since initial recognition without undue cost or effort, then the entity must
recognise a loss allowance based on lifetime ECLs at each reporting date until the
financial instrument is derecognised. Only if at subsequent reporting dates, the entity is
able to determine that the financial instrument has low credit risk at the reporting date,
then it would recognise a loss allowance based only on 12-month ECLs.
[IFRS 9.B7.2.2, 7.2.20].
As with the approximation of EIRs (see 5.7 above), entities will be faced with a challenge
in interpreting how much flexibility is afforded by the term ‘to approximate’. Also, it is
unclear to what extent entities would need to search for information that is available
without undue cost or effort.
The requirement to recognise lifetime ECLs may encourage entities to look for and use
information about the initial credit risk and hence, will enhance comparability and the
quality of the information provided. On the other hand, some entities may be
discouraged to use such information if they are able to absorb lifetime ECLs on
transition. While such an approach may result in inconsistency between entities, the
IASB believes that the transition requirements and reliefs are the best way to balance
the provision of useful and relevant information with the associated cost of providing it.
[IFRS 9.BC7.79].
3872 Chapter 47
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