Low credit risk financial instruments

IFRS 9 includes a practical expedient for low credit risk financial instruments. Characteristics of low credit risk financial instruments include:

  • Strong capacity to meet its contractual cash flow obligations in the near term,
  • Adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the borrower’s ability to pay,
  • External rating of investment grade or an internal credit rating equivalent.

The instrument must be considered to have low credit risk from a market participant’s perspective. For low risk credit instruments, it is assumed that credit risk has not increased significantly at each reporting date. This means that only 12 month expected credit losses will be recorded for these financial instruments.

Calculate interest revenue on gross carrying amount (i.e. continue original effective interest rate interest income recognition).


If a financial instrument has low credit risk, then an entity is allowed to assume at the reporting date that no significant increase in credit risks has occurred.

Low credit risk is one of three operational simplifications or reliefs to companies for assessment of credit risk, together with past due status and 12-month risks  as an approximation for a change in lifetime risks.


Determination

  • Determination of the low credit risk may be based on internal credit risk ratings or other methodologies that are consistent with a globally understood definition of low credit risk and that consider the risks and the type of financial instruments that are being assessed.
  • External ratings of ‘investment grade’ may be considered as having low credit risk
  • Financial instruments are not required to be externally rated to be considered to have low credit risk.
  • Financial instruments should be considered to have low credit risk from a market participant perspective taking into account all of the terms and conditions of the financial instrument.

Examples

As an indicative calibration, a financial instrument with an external rating of Investment Grade is an example of an instrument that may be considered to have a low credit risk.

A loan is not considered to have a low credit risk simply because:

  • the value of collateral results in a low risk of loss. This is because collateral affects the magnitude of the loss when default occurs (Loss given default, rather than the risk of default,
  • it has a lower risk of default relative to other financial instruments.

General model of measurement of insurance contracts

Low credit risk financial instruments

Low credit risk financial instruments

Low credit risk financial instruments Low credit risk financial instruments Low credit risk financial instruments Low credit risk financial instruments

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