Significant increase in Credit risk

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Last Updated on 27/02/2021 by 75385885

The transition from recognising 12-month expected credit losses (i.e. Stage 1) to lifetime expected credit losses (i.e. Stage 2) in IFRS 9 is based on the notion of a significant increase in credit risk over the remaining life of the instrument in comparison with the credit risk on initial recognition. The focus is on the changes in the risk of a default, and not the changes in the amount of expected credit losses.

A significant increase in credit risk (moving from Stage 1 to Stage 2) can include:

  • Changes in general economic and/or market conditions (e.g. expected increase in unemployment rates, interest rates);
  • Significant changes in the operating results or financial position of the borrower;
  • Changes in the amount of financial support available to an entity (e.g. from its parent);
  • Expected or potential breaches of covenants;
  • Expected delay in payment (Note: Actual payment delay may not arise until after there has been a significant increase in credit risk).

Note: Significant is not defined in IFRS 9.

IFRS Synonyms:
Significant Credit risk increase