IFRS 7 Disclosures for IFRS 9 Financial instruments

This is a high level summary of the disclosure requirements added to IFRS 7 Financial Instruments: Disclosures that accompanies the impairment model in IFRS 9 Financial Instruments.

Credit risk management practices

An entity is required to disclose:

  • How it determines whether the credit risk has increased significantly (i.e. transfer between Stage 1 and Stage 2) including if and how:
    • Financial instruments are considered to have low credit risk (refer to Exception for low credit risk financial instruments),
    • The 30 day rebuttable presumption has been rebutted,
  • The entity’s definition of default and the reasons for selecting this definition,
  • How the financial instruments were grouped (if assessed on a collective basis),
  • The entity’s write off policy,
  • For financial assets that have been modified (renegotiated) during the period how the entity determines whether there has been an significant increase in credit risk.

Inputs, assumptions and estimation techniques

An explanation is required of the inputs, assumptions and estimation techniques used including:

  • The basis of inputs used for Stages 1, 2 and 3,
  • The estimation techniques used for Stages 1, 2 and 3,
  • An explanation of the changes in the estimates of credit risk and the cause of those changes to Stages 1, 2 and 3,
  • How forward-looking information has been used to determine expected credit losses (including how macroeconomic information has been used),
  • Any changes in the estimation technique and the reasons for those changes.

Reconciliations

A reconciliation is required between the opening and closing balances of the gross carrying amount and the associated loss allowance for:

  • Financial assets with a loss allowance measured at an amount equal to 12-month expected credit losses i.e. Stage 1,
  • Financial assets with a loss allowance measured at an amount equal to lifetime expected credit losses but are not credit impaired i.e. Stage 2,
  • Financial assets that are credit impaired at the reporting date (but that are not purchased or originated credit-impaired financial assets),
  • Purchased or originated credit-impaired financial assets. In addition to the reconciliation for these assets, an entity is required to disclose the total amount of undiscounted expected credit losses at initial recognition,
  • Trade receivables, contract assets or lease receivables.

The standard also requires an explanation of how significant changes in the gross carrying amount contributed to changes in the loss allowance. For example, the changes could be due to:

  • Newly originated or acquired financial instruments,
  • Modifications,
  • Financial instruments that have been derecognised,
  • Transfers between Stage 1, Stage 2 and Stage 3 of the loss allowance accounts.

Here is an example of these disclosure requirements.

IFRS 7 requires entities to disclose reconciliation between the opening balance and the closing balance of the gross carrying amount and the associated loss allowance. The standard also requires an explanation of how significant changes in the gross carrying amount contributed to changes in the loss allowance.

Significant changes in the gross carrying amount of mortgage loans that contributed to changes in the loss allowance were due to:

  • Acquisition of the ABC prime mortgage portfolio increased the residential mortgage book by x percent, with a corresponding increase in the 12-month expected credit loss allowance,
  • Write-off of the XYZ portfolio following the collapse of the local market reduced the credit-impaired financial assets loss allowance by CUXXX,
  • Expected increase in unemployment in Region X caused a net increase of CUXXX in the lifetime expected credit loss allowance.

Modifications (renegotiations)

Disclosure is required, for financial assets that have been modified (renegotiated) during the period, of the amortised cost and the modification gain or loss where the financial assets had an impairment allowance equal to lifetime expected credit losses.

Collateral or other credit enhancements

IFRS 7 requires the following disclosures:

  • A description of the collateral held as security and other credit enhancements (including a discussion on the quality of the collateral held and an explanation of any changes in credit quality as a result of deterioration or changes in the collateral policies of the entity),
  • The gross carrying amount of financial assets that have an expected credit loss of zero because of collateral,
  • For financial instruments in Stage 3, quantitative information about the extent to which collateral and other credit enhancements reduce the extent of expected credit losses.

IFRS 7 also requires disclosure of the amounts that best represent the entity’s maximum exposure to credit risk at the end of the reporting period without taking account of any collateral held or other credit enhancements.

Write-offs

An entity is required to disclose the contractual amount of financial assets written off that are still subject to enforcement activity.

Credit risk concentrations

IFRS 7 requires an entity to disclose its credit risk exposure and significant credit risk concentrations. Disclosure is required, by credit risk rating grade, of the gross carrying amount of financial assets and the amount recognised as a provision for loan commitments and financial guarantee contracts in a particular grade.

This analysis is disclosed separately for:

  • Financial assets with a loss allowance measured at an amount equal to 12-month expected credit losses i.e. Stage 1,
  • Financial assets with a loss allowance measured at an amount equal to lifetime expected credit losses but are not credit impaired Stage 2,
  • Financial assets that are credit impaired at the reporting date (but that are not purchased or originated credit-impaired financial assets) Stage 3,
  • Purchased or originated credit-impaired financial assets. In addition to the reconciliation for these assets, an entity is required to disclose the total amount of undiscounted expected credit losses at initial recognition,
  • Trade receivables, contract assets or lease receivables.

As a practical expedient, for trade receivables and lease receivables to which an entity applies the simplified approach (i.e. the loss allowance is measured as the amount equal to lifetime expected credit losses), this disclosure may be based on a provision matrix.

The number of grades used is required to be consistent with the number of grades that the entity uses to report internally to key management personnel.

If information about credit risk rating grades is not available without undue cost and effort and an entity uses the 30 days rebuttable presumption to assess whether credit risk has increased significantly, it is necessary to provide an analysis of the financial assets with past due status.

Here is an example of these disclosure requirements.

IFRS 7 requires entities to disclose its credit risk exposure and significant credit risk concentrations of its financial assets.

Consumer loan credit risk exposure by internal rating grades

Corporate loan credit risk exposure by external rating grades

Trade receivables

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