IFRS 7 Credit risk disclosures

IFRS 7 Credit risk disclosures – Credit risk is part of the risk disclosures requirements under IFRS 7 Financial Instruments: Disclosures.

Management should disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period [IFRS 7 31]. The disclosures require focus on the risks that arise from financial instruments and how they have been managed. These risks typically include, but are not limited to, credit risk, liquidity risk and market risk [IFRS 7 32].

Qualitative and quantitative disclosures are required. Management should therefore disclose, for each type of risk arising from financial instruments:

  • The exposures to risk and how they arise, and its objectives, policies and processes for managing the risk and the methods used to measure the risk (qualitative disclosure) [IFRS 7 33]; and
  • Summary quantitative data about its exposure to that risk at the end of the reporting period (quantitative disclosures) [IFRS 7 34].

If the quantitative data disclosed at the end of the reporting period is unrepresentative of an entity’s exposure to risk during the period, management should provide further information that is representative [IFRS 7 35].

IFRS 7 36 requires an entity to disclose information about its exposure to credit risk by class of financial instrument. Such disclosures include information on the credit quality of financial assets with credit risk.

Table – Overview exposure to financial risks, possible disclosures and management of risk

Financial risk

Exposure arising from

Possible disclosure

Management of risk

Market riskCurrency risk

Future commercial transactions

Recognised financial assets and liabilities not denominated in LC

Cash flow forecasting

Sensitivity analysis

Foreign currency forwards and foreign currency options

Market risk – Interest rate risk

Long-term borrowings at variable rates

Sensitivity analysis

Interest rate swaps

Market risk – Other price risks

Investments in equity securities

Sensitivity analysis

Portfolio diversification

Credit risk

Cash and cash equivalents, trade receivables, derivative financial instruments, debt investments and contract assets

Ageing analysis

Credit ratings

Diversification of bank deposits, credit limits and letters of credit

Investment guidelines for debt investments

Liquidity risk

Borrowings and other liabilities

Rolling cash flow forecasts

Maturity analysis

Availability of committed credit lines and borrowing facilities

Extensive example credit risk disclosures General Business

Credit risk

Credit risk arises from cash and cash equivalents, contractual cash flows of debt investments carried at amortised cost, at fair value through other comprehensive income (FVOCI) and at fair value through profit or loss (FVPL), favourable derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables. [IFRS 7 33(a),(b)]

(i) Risk management
Credit risk is managed on a group basis. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted. [IFRS 7 35B]

If wholesale customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal or external ratings in accordance with limits set by the board. The compliance with credit limits by wholesale customers is regularly monitored by line management. [IFRS 7 34 (c)]

Sales to retail customers are required to be settled in cash or using major credit cards, mitigating credit risk. There are no significant concentrations of credit risk, whether through exposure to individual customers, specific industry sectors and/or regions.

For derivative financial instruments, management has established limits so that, at any time, less than 10% of the fair value of favourable contracts outstanding are with any individual counterparty.

The group’s investments in debt instruments are considered to be low risk investments. The credit ratings of the investments are monitored for credit deterioration.

(ii) Security
For some trade receivables the group may obtain security in the form of guarantees, deeds of undertaking or letters of credit which can be called upon if the counterparty is in default under the terms of the agreement.

(iii) Impairment of financial assets
The group has four types of financial assets that are subject to the expected credit loss model:

  • trade receivables for sales of inventory and from the provision of consulting services
  • contract assets relating to IT consulting contracts
  • debt investments carried at amortised cost, and
  • debt investments carried at FVOCI.
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While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the identified impairment loss was immaterial.

Trade receivables and contract assets

The group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets. [IAS 1 117 , IFRS 7 21, IFRS 9 5.5.15]

To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. The contract assets relate to unbilled work in progress and have substantially the same risk characteristics as the trade receivables for the same types of contracts. The group has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets. [IFRS 7 35F(c)]

The expected loss rates are based on the payment profiles of sales over a period of 36 months before 31 December 2019 or 1 January 2019 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The group has identified the GDP and the unemployment rate of the countries in which it sells its goods and services to be the most relevant factors, and accordingly adjusts the historical loss rates based on expected changes in these factors. [IFRS 7 35G]

On that basis, the loss allowance as at 31 December 2019 and 31 December 2018 was determined as follows for both trade receivables and contract assets:

IFRS 7 Credit risk disclosures

IFRS References: IFRS 7 35N, IFRS 7 35K(a),(b)

The loss allowances for trade receivables and contract assets as at 31 December reconcile to the opening loss allowances as follows: [IFRS 7 35H(b)(iii)]

Contract assets

Trade receivables

2019

CU ‘000

2018

CU ‘000

2019

CU ‘000

2018

CU ‘000

Opening loss allowance at 1 January

36

30

350

115

Increase in loan loss allowance recognised in profit or loss during the year

6

846

635

Receivables written off during the year as uncollectible

-530

-345

Unused amount reversed

-8

-20

-55

Closing loss allowance at 31 December

28

36

646

350

Trade receivables and contract assets are written off where there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the group, and a failure to make contractual payments for a period of greater than 120 days past due. [IFRS 7 35F(e)]

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Impairment losses on trade receivables and contract assets are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item.

Debt investments
All of the entity’s debt investments at amortised cost and FVOCI are considered to have low credit risk, and the loss allowance recognised during the period was therefore limited to 12 months’ expected losses. Management consider ‘low credit risk’ for listed bonds to be an investment grade credit rating with at least one major rating agency. Other instruments are considered to be low credit risk where they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term. [IFRS 7 35F(a)(i)]

Other financial assets at amortised cost
Other financial assets at amortised cost include debenture assets, zero coupon bonds and listed corporate bonds, loans to related parties and key management personnel, and other receivables.[IAS1 117]

The loss allowance for other financial assets at amortised cost as at 31 December reconciles to the opening loss allowance as follows:

IFRS 7 Credit risk disclosures

Debt investments at fair value through other comprehensive income
Debt investments at fair value through other comprehensive income (FVOCI) include listed and unlisted debt securities. The loss allowance for debt investments at FVOCI is recognised in profit or loss and reduces the fair value loss otherwise recognised in OCI. [IAS 1 117, IFRS 9 5.5.2]

The loss allowance for debt investments at FVOCI as at 31 December reconciles to the opening loss allowance as follows: [IFRS 7 35H(a), IFRS 7 16A]

IFRS 7 Credit risk disclosures

(iv) Significant estimates and judgements

Impairment of financial assets

The loss allowances for financial assets are based on assumptions about risk of default and expected loss rates. The group uses judgement in making these assumptions and selecting the inputs to the impairment calculation, based on the group’s past history and existing market conditions, as well as forward-looking estimates at the end of each reporting period. Details of the key assumptions and inputs used are disclosed in the tables above. [IFRS 9 5.5.17, IAS 1 125]

(v) Net impairment losses on financial and contract assets recognised in profit or loss1

During the year, the following gains/(losses) were recognised in profit or loss in relation to impaired financial assets:

IFRS 7 Credit risk disclosures

IFRS Reference: IAS 1 82(ba)

Of the above impairment losses, CU739,000 (2018 – CU607,000) relate to receivables arising from contracts with customers (see note 3). [IFRS 15 113(b)]

(vi) Financial assets at fair value through profit or loss

The entity is also exposed to credit risk in relation to debt investments that are measured at fair value through profit or loss. The maximum exposure at the end of the reporting period is the carrying amount of these investments (CU2,390,000; 2018 – nil). [IFRS 7 36]

Extensive example credit risk disclosures Insurance industry

Credit risk

Credit risk is the risk of financial loss to the Group if a counterparty to a reinsurance contract or financial instrument fails to meet its contractual obligations, and arises principally from the Group’s reinsurance contract assets and investments in debt securities. For risk management reporting purposes, the Group considers and consolidates all elements of credit risk exposures – e.g. individual obligor default risk, country risk and sector risk. [IFRS 7 33(a), IFRS 17 124(a), IFRS 7 Definitions]

i. Management of credit risk IFRS 7 Credit risk disclosures
The board of directors has delegated responsibility for the oversight of credit risk to the Group’s asset and liability committee (ALCO). The Group’s credit department, which reports to ALCO, is responsible for managing the Group’s credit risk, including the following. [IFRS 7 33(b), IFRS 7 35B(a), IFRS 17 124(b)]

  • Formulating credit policies in consultation with business units, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures and compliance with regulatory and statutory requirements. IFRS 7 Credit risk disclosures
  • Establishing the authorisation structure for the approval and renewal of credit facilities, intermediaries and reinsurers in line with credit policies. Authorisation limits are allocated to business units. Larger exposures require approval by ALCO or the board of directors, as appropriate. IFRS 7 Credit risk disclosures
  • Reviewing and assessing credit risk. Group credit reviews all credit exposures in excess of designated limits, before further exposures are committed to by the business unit concerned.  IFRS 7 Credit risk disclosures
  • Limiting concentrations of exposure to counterparties, geographies and industries, and by issuer, credit rating band and market liquidity. Reinsurers and intermediaries are assessed based on external credit ratings and internal reviews. For debt securities, the Group has a policy to invest only in high-quality corporate and government debt and does not invest in speculative- grade assets – i.e. those below BBB- based on [Rating Agency Y] ratings. IFRS 7 Credit risk disclosures
  • Developing and maintaining the Group’s risk gradings to categorise exposures according to the degree of risk of default when external credit ratings are not available. The current risk grading framework consists of eight grades reflecting varying degrees of risk of default (see (ii) and (iv)). The responsibility for setting risk grades lies with Group credit. Risk grades are subject to regular review by the Group risk committee. Specifically as part of this, the impact of a reinsurer default is monitored on a group-wide basis and managed accordingly. The internal risk grades correspond to [Rating Agency Y] ratings as follows. IFRS 7 Credit risk disclosures
Low risk IFRS 7 Credit risk disclosures
Grade 1 IFRS 7 Credit risk disclosures AAA
Grade 2 IFRS 7 Credit risk disclosures AA to AA+
Grade 3 IFRS 7 Credit risk disclosures A- to A+
Grade 4 IFRS 7 Credit risk disclosures BBB- TO BBB+
Fair risk IFRS 7 Credit risk disclosures
Grade 5 IFRS 7 Credit risk disclosures BB- TO BB+
Substandard IFRS 7 Credit risk disclosures
Grade 6 IFRS 7 Credit risk disclosures B- TO B+
Doubtful IFRS 7 Credit risk disclosures
Grade 7 IFRS 7 Credit risk disclosures C TO CCC+
Loss IFRS 7 Credit risk disclosures
Grade 8 IFRS 7 Credit risk disclosures D
  • Developing and maintaining the Group’s processes for measuring ECL. This includes processes for: IFRS 7 Credit risk disclosures
    • initial approval, regular validation and back-testing of the models used; and IFRS 7 Credit risk disclosures
    • incorporation of forward-looking information. IFRS 7 Credit risk disclosures
  • Reviewing compliance of business units with agreed exposure limits, including those for selected industries, country risk and product types. Regular reports on the credit quality of local portfolios are provided to Group credit, which may require appropriate corrective action to be taken. These include reports containing estimates of loss allowances.
  • Providing advice, guidance and specialist skills to business units to promote best practice throughout the Group in the management of credit risk.
Something else -   Adjusting event after the reporting date

Each business unit is required to implement Group credit policies and procedures, with credit approval authorities delegated from ALCO. Each business unit has a credit risk officer, who reports on all credit-related matters to local management and Group credit. Each business unit is responsible for the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its portfolios on an ongoing basis, including those subject to central approval. IFRS 7 Credit risk disclosures

Periodic audits of business units and Group credit processes are undertaken by internal audit. IFRS 7 Credit risk disclosures

ii. Credit quality analysis IFRS 7 Credit risk disclosures
The following table sets out information about the credit quality of reinsurance contract assets and debt investments measured at FVTPL. [IFRS 7 34(a), IFRS 17 125(a), IFRS 17 131(b)]

Credit quality

Derivatives IFRS 7 Credit risk disclosures
The Group’s derivatives are entered into with banks and other financial institutions, which are rated AA- to AA+, based on [Rating Agency Y] ratings.

The following tables set out the credit quality analysis for debt investments measured at FVOCI and at amortised cost and lease receivables. Unless specifically indicated, the amounts in the table represent gross carrying amounts. IFRS 7 Credit risk disclosures

For explanations of the terms ’12-month ECL’, ‘lifetime ECL’ and ‘credit-impaired’, see Note 44(G)(iii). IFRS 7 Credit risk disclosures

Financial investments

Financial investments 2e

Financial investments 3e

Operating lease receivables
The Group uses a provision matrix to measure the ECL of operating lease receivables. The following table provides information about the exposure to credit risk and ECL for operating lease receivables. [IFRS 7 35K(a), IFRS 7 35M(b)(iii), IFRS 7 35N, IFRS 7 B8I] IFRS 7 Credit risk disclosures

Lease credit rsisk

iii. Collateral for securities lending and repurchase agreements and derivatives
The Group receives and pledges collateral in respect of securities lending, sale-and-repurchase and reverse sale-and-repurchase transactions, and certain derivative contracts. The collateral may be in the form of readily realisable securities (e.g. government bonds) or cash. IFRS 7 Credit risk disclosures

This collateral is subject to standard industry terms including, where appropriate, an International Swaps and Derivatives Association (ISDA) credit support annex. This means that securities received or given as collateral can be pledged or sold during the term of the transaction but have to be returned on maturity of the transaction. The terms also give each party the right to terminate the transaction on the counterparty’s failure to post collateral. [IFRS 7 14(b), IFRS 7 15(c)] IFRS 7 Credit risk disclosures

Derivative transactions are transacted on exchanges, with central clearing counterparties or entered into under ISDA master netting agreements. In general, under these agreements, in certain circumstances – e.g. when a credit event such as a default occurs – all outstanding transactions under the agreement with the counterparty are terminated, the termination value is assessed and only a single net amount is due or payable in settlement of all transactions with the counterparty. IFRS 7 Credit risk disclosures

The Group executes a credit support annex in conjunction with the ISDA agreement, which requires the Group and its counterparties to post collateral to mitigate counterparty credit risk. Collateral is also posted daily on trades that are not settled to market, in respect of derivatives transacted on exchanges and with central clearing counterparties. [IFRS 7 13E, IFRS 7 B50]

The Group’s securities lending, sale-and-repurchase and reverse sale-and-repurchase transactions are covered by master agreements with netting terms similar to those of ISDA master netting agreements.

Collateral held
The Group holds collateral against its credit exposure arising from derivative assets and receivables from reverse sale-and-repurchase counterparties. [IFRS 7 35K(b)(i), IFRS 7 36(b), IFRS 7 B8G]

Collateral

For marketable securities received as collateral, legal title is always transferred to the Group. However, the Group does not recognise these securities as assets in the absence of the transferor’s default because the transferor retains substantially all of the risks and rewards of ownership. Instead, it derecognises any consideration paid and recognises a receivable from the transferor (see Note 21). [IFRS 9 3.2.23(d), IFRS 9 B3.2.15, IAS 39 37(d), IAS 39 AG50]

If the Group sells the securities received, then it recognises the proceeds from the sale and a financial liability measured at fair value for its obligation to return the securities. [IFRS 9 3.2.23(b), IAS 39 37(b)]

At 31 December 2021, the fair value of financial assets accepted as collateral that the Group is permitted to sell or repledge in the absence of default was €6,793 million (2020: €7,338 million). None of the financial assets accepted as collateral have been sold or repledged. [IFRS 7 15(a)–(b)]

At 31 December 2021, the Group held marketable debt securities of €3 million (2020: €2 million) that were obtained during the year by taking possession of collateral held as security against receivables from reverse sale-and-repurchase counterparties. The Group’s policy is to pursue timely realisation of the collateral in an orderly manner. The Group does not generally use the non- cash collateral for its own operations. [IFRS 7 38]

During 2021 and 2020, there were no significant changes in the quality of collateral or changes in the Group’s collateral policies. [IFRS 7 35K(b)(ii)]

Collateral pledged
The Group also pledges collateral for certain derivative liabilities and for payables to sale-and- repurchase and securities lending counterparties.

At 31 December 2021, securities lent to unrelated parties under securities lending transactions or subject to sale-and-repurchase agreements in which the counterparties obtain the right to sell or pledge the assets amount to €8,267 million (2020: €8,205 million). These securities are reclassified as ‘financial investments transferred under securities lending and repurchase agreements’ separately from other assets. The Group continues to recognise the transferred securities in their entirety because it retains substantially all of the risks and rewards of ownership. [IFRS 7 14(a), IFRS 7 42D(a)–(b), (e), IFRS 9 3.2.23(a), IFRS 9 B3.2.16(a)–(c), IAS 39 37(a), IAS 39 AG51(a)–(c)]

Because the Group transfers the contractual rights to the cash flows of the securities as part of the arrangement, it does not have the ability to use the transferred assets during the term of the arrangement.

Any consideration received in the transfer is recognised as a financial liability. The carrying amount of the liabilities associated with the transferred securities is €8,274 million (2020: €8,214 million) and is included in ‘payables’ (see Note 27). [IFRS 7 14(b), IFRS 7 42D(c)]

IFRS 7 Credit risk disclosures

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