Impairment of investments and loans

Impairment of investments and loans is about impairment in a ‘normal’ business not complicated accounting but straightforward accounting calculations. Impairment of investments and loans

Normal operations

Although the focus for IFRS 9 Financial Instruments is on financial institutions such as banks and insurance companies, ‘normal’ operating entities are also affected by IFRS 9. Maybe their investment and loan portfolios are less complex but in operating a business and as part of the internal credit risk management practice policy making it is still important to implement the impairment model under IFRS 9 Financial Instruments. Impairment of investments and loans

Impairment not in IFRS 9 Financial instruments

The 7 Steps for impairment

Take the following steps to administrate your policy for accounting for impairments of financial assets. Impairment of investments and loans

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Step 1 Define Default, Step 2 Decide to use the general or simplified approach, Step 3 Define significant increase in credit risk, Step 4 Define low credit risk, Step 5 Allocate receivables to high and low credit risk, Step 6 Apply the provision matrix, Step 7 Measure expected credit losses Impairment of investments and loans

New impairment model

IFRS 9 introduced a new impairment model based on expected credit losses, resulting in the recognition of a loss allowance before the credit loss is incurred. Under this approach, entities need to consider current conditions and reasonable and supportable forward-looking information that is available without undue cost or effort when estimating expected credit losses. IFRS 9 sets out a ‘general approach’ to impairment. However, in some cases this ‘general approach’ is overly complicated and some simplifications were introduced.

‘General approach’ to impairment

Under the ‘general approach’, a loss allowance for lifetime expected credit losses is recognised for a financial instrument if there has been a significant increase in credit risk (measured using the lifetime probability of default) since initial recognition of the financial asset. If, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, a loss allowance for 12-month expected credit losses is recognised. In other words, the ‘general approach’ has two bases on which to measure expected credit losses; 12-month expected credit losses and lifetime expected credit losses. Impairment of investments and loans

Lifetime expected credit loss

Lifetime expected credit loss is the expected credit losses that result from all possible default events over the expected life of a financial instrument. 12-month expected credit loss is the portion of the lifetime expected credit losses that represent the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date.

Default

The term ‘default’ is not defined in IFRS 9 and an entity will have to establish its own policy for what it considers a default, and apply a definition consistent with that used for internal credit risk management purposes for the relevant financial instrument. IFRS 9 includes a rebuttable presumption that a default does not occur later than when a financial asset is 90 days past due unless an entity has reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate.

Measure expected credit losses

When it comes to the actual measurement under the ‘general approach’ an entity should measure expected credit losses of a financial instrument in a way that reflects the principles of measurement set out in IFRS 9.

Simplified approach

Next to recording loss allowances based on expected credit losses under the ‘general approach’  IFRS 9 has also made it possible to use a simplified approach for trade receivables, contract assets and lease receivables. When it comes to the actual measurement of a loss allowance under the‘general approach’ an entity should measure expected credit losses of a financial instrument in a way that reflects the principles of measurement set out in IFRS 9.

Expected credit losses requirements

These dictate that the estimate of expected credit losses should reflect:

• an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;
• the time value of money; and Impairment of investments and loans
• reasonable and supportable information about past events, current conditions and forecasts of future economic conditions that is available without undue cost or effort at the reporting date. Impairment of investments and loans

Continue reading: Step 1 Define default Impairment of investments and loans

Impairment of investments and loans

Impairment of investments and loans

Impairment of investments and loans Impairment of investments and loans Impairment of investments and loans

Impairment of investments and loans Impairment of investments and loans Impairment of investments and loans