– making loss provision calculations simple –
The second simplification available in IFRS 9 sets out a rebuttable presumption that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due. [IFRS 188.8.131.52]
The first simplification available in IFRS 9 is the low credit presumption.
When payments are 30 days past due, a financial asset is considered to be in stage 2 and lifetime expected credit losses are recognised.
An entity can rebut this presumption when it has reasonable and supportable information available that demonstrates that even if payments are 30 days or more past due, it does not represent a significant increase in the credit risk of a financial instrument.
This 30 days past due simplification permits the use of delinquency or past due status, together with other more forward-looking information, to identify a significant increase in credit risk. The IASB decided that this simplification should be required as a rebuttable presumption to ensure that its application does not result in an entity reverting to an incurred loss model.[IFRS 9.BC5.190]
The IASB is concerned that past due information is a lagging indicator. Typically, credit risk increases significantly before a financial instrument becomes past due or other lagging borrower-specific factors (for example, a modification or restructuring) are observed.
Consequently, when reasonable and supportable information that is more forward-looking than past due information is available without undue cost or effort, it must be used to assess changes in credit risk and an entity cannot rely solely on past due information. However, if more forward-looking information (either on an individual or collective basis) is not available without undue cost or effort, an entity may use past due information to assess changes in credit risks.
This presumption does not apply if significant increases in credit risk have already occurred before contractual payments are more than 30 days past due. On the other hand, an entity can rebut the presumption if it has information that demonstrates that credit risk has not increased significantly even though contractual payments are more than 30 days past due.
Such evidence may include knowledge that a missed non-payment is because of administrative oversight rather than financial difficulty of the borrower, or historical information suggests significant increases in credit risk only occur when payments are more than 60 days past due. [IFRS 184.108.40.206 and IFRS 9.B5.5.19 – B5.5.24]
The more than 30 days past due rebuttable presumption is intended to serve as a backstop even when forward-looking information is used (e.g., macroeconomic factors on a portfolio level). Moreover, as stated earlier, the standard is clear that an entity may not align the definition and criteria used to identify significant increases in credit risk (and the resulting recognition of lifetime ECLs) to when a financial asset is regarded as credit-impaired or to an entity’s internal definition of default.
An entity should normally identify significant increases in credit risk and recognise lifetime ECLs before default occurs or the financial asset becomes credit-impaired, either on an individual or collective basis.
The Committee agrees with the view expressed in IFRS 9 that delinquency is a lagging indicator of significant increases in credit risk. Banks should have credit risk assessment and management processes in place to ensure that credit risk increases are detected well ahead of exposures becoming past due or delinquent.
The Committee expects that a bank would not use the more-than-30-days-past-due rebuttable presumption as a primary indicator of transfer to lifetime expected credit losses, while recognising that appropriate use of this rebuttable presumption as a backstop measure would not be precluded in accordance with IFRS 9 alongside other, earlier indicators for assessing significant increase in credit risk.
The Committee expects that any assertion that the more-than-30-days-past-due presumption is rebutted on the basis that there has not been a significant increase in credit risk will be accompanied by a thorough analysis clearly evidencing that 30 days past due is not correlated with a significant increase in credit risk.
For example, in some jurisdictions it is common practice for borrowers to delay repayment for certain exposures, but history shows that those missed payments are fully recouped in the succeeding months (often referred to as a technical default).
Note, however, that even when missed payments are fully recouped, the present value of cash flows received may be materially lower because of the delay in receiving them. Such analysis should consider both current and reasonable and supportable forward-looking information that may cause future cash shortfalls to differ from historical experience.
In this regard, the Committee expects a bank to use relevant forward-looking information that is reasonable and supportable, to analyse whether there is any substantive relationship between such information and credit risk drivers. The Committee expects that a bank will not use the 30-days-past-due rebuttable presumption unless it has demonstrated that the forward-looking information had no substantive relationship with the credit risk driver or such information is not available without undue cost or effort.
In the limited instances where past-due information is the best criterion available to a bank to determine when exposures should move to the lifetime expected credit losses category, banks should pay particular attention to their measurement of 12-month ECL allowance to ensure that ECL are appropriately captured in accordance with the measurement objective of IFRS 9.
Moreover, banks should recognise that significant reliance on backward-looking information will introduce bias into the implementation of an ECL model and that the Committee expects banks to pay particular attention to ensuring that the objectives of the IFRS 9 impairment requirements (ie to reflect ECL that meet the stated measurement objectives and to capture all significant increases in credit risk) are met.
30 days past due
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