This ‘management view’ approach was adopted by the IASB because it was considered
to: [IFRS 7.BC47]
• provide a useful insight into how the entity views and manages risk;
• result in information that has more predictive value than information based on
assumptions and methods that management does not use, for instance, in
considering the entity’s ability to react to adverse situations;
• be more effective in adapting to changes in risk measurement and management
techniques and developments in the external environment;
• have practical advantages for preparers of financial statements, because it allows
them to use the data they use in managing risk; and
• be consistent with the approach used in segment reporting (see Chapter 32).
When several methods are used to manage a risk exposure, the information disclosed
should use the method(s) that provide the most relevant and reliable information. It is
noted, in this context, that IAS 8 – Accounting Policies, Changes in Accounting Estimates
and Errors – discusses relevance and reliability (see Chapter 3 at 4.3). [IFRS 7.B7].
Where the quantitative data disclosed as at the reporting date are unrepresentative of
an entity’s exposure to risk during the period, further information that is representative
should be provided. [IFRS 7.35]. For example, if an entity typically has a large exposure to
a particular currency, but at year-end unwinds the position, the entity might disclose a
graph that shows the exposure at various times during the period, or it might disclose
the highest, lowest and average exposures. [IFRS 7.IG20].
In developing IFRS 7, the IASB considered whether quantitative information about
average risk exposures during the period should be given in all cases. However, they
considered that such information is more informative only if the risk exposure at the
reporting date is not representative of the exposure during the period. They also
considered it would be onerous to prepare. Consequently, they decided that IFRS 7
would only require disclosure by exception, i.e. when the position at the reporting date
was unrepresentative of the exposure during the reporting period. [IFRS 7.BC48].
5.3 Credit
risk
The disclosure requirements in respect of impairment are expanded significantly when
compared to those under IAS 39. Those requirements are also supplemented by some
detailed implementation guidance. The requirements of IFRS 9 relating to the
measurement of impairments are dealt with in Chapter 47.
4198 Chapter 50
5.3.1
Scope and objectives
The objective of these disclosures is to enable users to understand the effect of credit
risk on the amount, timing and uncertainty of future cash flows. To achieve this
objective, the disclosures should provide: [IFRS 7.35B]
• information about the entity’s credit risk management practices and how they relate
to the recognition and measurement of expected credit losses, including the methods,
assumptions and information used to measure those losses (see 5.3.2 below);
• quantitative and qualitative information that allows users of financial statements to
evaluate the amounts in the financial statements arising from expected credit
losses, including changes in the amount of those losses and the reasons for those
changes (see 5.3.3 below); and
• information about the entity’s credit risk exposure, i.e. the credit risk inherent in
its financial assets and commitments to extend credit, including significant credit
risk concentrations (see 5.3.4 below).
An entity will need to determine how much detail to disclose, how much emphasis to
place on different aspects of the disclosure requirements, the appropriate level of
aggregation or disaggregation and whether additional explanations are necessary to
evaluate the quantitative information disclosed. [IFRS 7.35D]. If the disclosures provided
are insufficient to meet the objectives above, additional information that is necessary to
meet those objectives should be disclosed. [IFRS 7.35E].
To avoid duplication, IFRS 7 allows this information to be incorporated by cross-
reference from the financial statements to some other statement that is available to users
of the financial statements on the same terms and at the same time, such as a
management commentary or risk report. Without the information incorporated by
cross-reference, the financial statements are incomplete. [IFRS 7.35C].
A number of the disclosures about credit risk are required to be given by class (see 3.3
above). In determining these classes, financial instruments in the same class should
reflect shared economic characteristics with respect to credit risk. A lender, for
example, might determine that residential mortgages, unsecured consumer loans and
commercial loans each have different economic characteristics. [IFRS 7.IG21].
Unless otherwise stated, the disclosure requirements set out at 5.3.2 to 5.3.4 below are
applicable only to financial instruments to which the impairment requirements in
IFRS 9 are applied. [IFRS 7.35A].
5.3.2
Credit risk management practices
An entity should explain its credit risk management practices and how they relate to the
recognition and measurement of expected credit losses. To meet this objective it should
disclose information that enables users to understand and evaluate: [IFRS 7.35F]
• how it has determined whether the credit risk of financial instruments has
increased significantly since initial recognition, including if and how:
• financial instruments are considered to have low credit risk, including the
classes of financial instruments to which it applies; and
Financial
instruments:
Presentation and disclosure 4199
• the presumption that there have been significant increases in credit risk since
initial recognition when financial assets are more than 30 days past due has
been rebutted;
• its definitions of default, including the reasons for selecting those definitions. This
may include: [IFRS 7.B8A]
• the qualitative and quantitative factors considered in defining default;
• whether different definitions have been applied to different types of financial
instruments; and
• assumptions about the cure rate, i.e. the number of financial assets that return
to a performing status, after a default has occurred on the financial asset;
• how the instruments were grouped if expected credit losses were measured on a
collective basis;
• how it has determined that financial assets are credit-impaired; and
• its write-off policy, including the indicators that there is no reasonable expectation
of recovery and information about the policy for financial assets that are written-
off but are still subject to enforcement activity.
An asset (or portion thereof) should be written off only if there is no reasonable
expectation of recovery; [IFRS 9.5.4.4] and
• how the requirements for the modification of contractual cash flows of financial
instruments have been applied, including how the entity:
• determines whether the credit risk on a financial asset that has been m
odified
while the loss allowance was measured at an amount equal to lifetime expected
credit losses has improved to the extent that the loss allowance reverts to being
measured at an amount equal to 12-month expected credit losses; and
• monitors the extent to which the loss allowance on financial assets meeting
the criteria in the previous bullet is subsequently remeasured at an amount
equal to lifetime expected credit losses.
Quantitative information that will assist users in understanding the subsequent
increase in credit risk of modified financial assets may include information
about modified financial assets meeting the criteria above for which the loss
allowance has reverted to being measured at an amount equal to lifetime
expected credit losses, i.e. a deterioration rate. [IFRS 7.B8B]. Including qualitative
information can also be a useful way of meeting this disclosure requirement.
An entity should also explain the inputs, assumptions and estimation techniques used to
apply the impairment requirements of IFRS 9. For this purpose it should disclose: [IFRS 7.35G]
• the basis of inputs and assumptions and the estimation techniques used to:
• measure 12-month and lifetime expected credit losses;
• determine whether the credit risk of financial instruments has increased
significantly since initial recognition; and
• determine whether a financial asset is credit-impaired.
This may include information obtained from internal historical information or
rating reports and assumptions about the expected life of financial instruments and
the timing of the sale of collateral [IFRS 7.B8C] or information about the estimated
4200 Chapter 50
maximum period considered when determining estimated credit losses in respect
of revolving credit facilities;4
• how forward-looking information has been incorporated into the determination of
expected credit losses, including the use of macroeconomic information. Where
relevant this will include information about the use of multiple economic scenarios
in determining those expected credit losses (see Chapter 47, particularly at 5.6).
In rare circumstances, there may be relevant forward-looking information that
cannot be incorporated into the determination of significant increases in credit risk
or the measurement of expected credit losses because of a lack of reasonable and
supportable information. In such cases disclosures should be made that are
consistent with the objective in IFRS 7, i.e. to enable users of the financial
statements to understand the credit risk to which the entity is exposed;5 and
• changes in estimation techniques or significant assumptions made during the
reporting period and the reasons for those changes.
5.3.3
Quantitative and qualitative information about amounts arising from
expected credit losses
An entity should explain the changes in the loss allowance and reasons for those changes
by presenting a reconciliation of the opening balance to the closing balance. This should
be given in a table for each relevant class of financial instruments, showing separately
the changes during the period for: [IFRS 7.35H]
• the loss allowance measured at an amount equal to 12-month expected credit losses;
• the loss allowance measured at an amount equal to lifetime expected credit losses for:
• financial instruments for which credit risk has increased significantly since
initial recognition but that are not credit-impaired financial assets;
• financial assets that are credit-impaired at the reporting date (but were not
credit-impaired when purchased or originated); and
• trade receivables, contract assets or lease receivables for which the loss
allowance is measured using a simplified approach based on lifetime expected
credit losses; and
• financial assets (or, potentially, loan commitments or financial guarantee contracts
– see Chapter 47 at 11) that were credit-impaired when purchased or originated.
The total amount of undiscounted expected credit losses on initial recognition of
any such assets during the reporting period should also be disclosed.
In addition, it may be necessary to provide a narrative explanation of the changes in the
loss allowance during the period. This narrative explanation may include an analysis of
the reasons for changes in the loss allowance during the period, including: [IFRS 7.B8D]
• the portfolio composition;
• the volume of financial instruments purchased or originated; and
• the severity of the expected credit losses.
Financial
instruments:
Presentation and disclosure 4201
For loan commitments and financial guarantee contracts the loss allowance is
recognised as a provision. Information about changes in the loss allowance for financial
assets should be shown separately from those for loan commitments and financial
guarantee contracts. However, if a financial instrument includes both a loan (i.e.
financial asset) and an undrawn loan commitment (i.e. loan commitment) component
and the expected credit losses on the loan commitment component cannot be
separately identified from those on the financial asset component, the expected credit
losses on the loan commitment should be recognised together with the loss allowance
for the financial asset. To the extent that the combined expected credit losses exceed
the gross carrying amount of the financial asset, the expected credit losses should be
recognised as a provision. [IFRS 7.B8E].
An explanation should also be provided of how significant changes in the gross carrying
amount of financial instruments during the period contributed to changes in the loss
allowance. This information should be provided separately for each class of financial
instruments for which loss allowances are analysed (see above). It should also include
relevant qualitative and quantitative information. Examples of changes in the gross
carrying amount of financial instruments that contribute to changes in the loss
allowance may include: [IFRS 7.35I]
• changes because of financial instruments originated or acquired during the
reporting period;
• the modification of contractual cash flows on financial assets that do not result in
a derecognition of those financial assets;
• changes because of financial instruments that were derecognised, including those
that were written-off during the reporting period; and
• changes arising from the measurement of the loss allowance moving from 12-
month expected credit losses to lifetime losses (or vice versa).
The information disclosed should provide an understanding of the nature and effect
of modifications of contractual cash flows on financial assets that have not resulted
in derecognition as well as the effect of such modifications on the measurement of
expected credit losses. The following information should therefore be given:
[IFRS 7.35J]
• the amortised cost before the modification and the net modification gain or loss
recognised for financial assets for which the contractual cash flows have been
modified during the reporting period while they had a loss allowance based on
lif
etime expected credit losses; and
• the gross carrying amount at the end of the reporting period of financial assets
that have been modified since initial recognition at a time when the loss
allowance was based on lifetime expected credit losses and for which the loss
allowance has changed during the reporting period to an amount equal to 12-
month expected credit losses.
4202 Chapter 50
These requirements apply to all modifications whether they are as a result of credit
related or other commercial reasons. However, if an entity has the ability to
separately identify different types of modifications and considers that the separate
disclosure of these items is relevant to achieving the overall objective of the
disclosures in this section, the entity could provide this additional detail as part of
the disclosure.6
The following example illustrates how this information might be presented. [IFRS 7.IG20B].
Example 50.5: Information about changes in the loss allowance
Mortgage loans – loss allowance
12-month
Lifetime
Lifetime
Credit-
expected
expected expected credit
impaired
credit losses
credit losses
losses
financial
(collectively
(individually
assets
assessed)
assessed)
(lifetime
expected
credit
losses)
CU’000
Loss allowance as at 1 January
X
X
X
X
Changes due to financial instruments
recognised as at 1 January:
– Transfer to lifetime expected credit losses
(X)
X
X
–
– Transfer to credit-impaired financial assets
(X)
–
(X) X
– Transfer to 12-month expected credit
X
(X)
(X)
–
losses
– Financial assets that have been
(X)
(X)
(X) (X)
derecognised during the period
New financial assets originated or purchased
X
–
–
–
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 832
