Significant increase in credit risk

Significant increase in credit risk – IFRS 9 contains a rebuttable presumption that credit risk has increased significantly when contractual payments are more than 30 days past due [IFRS 9 5.5.11]. This means that when payments are 30-days past due, the financial asset is considered to have moved from Stage 1 to Stage 2, and lifetime expected credit losses are recognised.

Past due is defined as failure to make a payment when that payment was contractually due. Feedback received by the IASB during the development of the new impairment model indicated than many entities manage credit risk on the basis of past due information, and have a limited ability to assess credit risk on an instrument by instrument basis in more detail on a timely basis.

Contractually due can be payable on the delivery date (30-days past due), payable within 30-days after the delivery date (so 60-days becomes the past due date), etcetera.Significant increase in credit risk

The 30-days past due presumption can be rebutted if other reasonable and supportable information is available that demonstrates that, even if payments are 30-days or more past due, this does not represent a significant increase in the credit risk of the financial asset. Significant increase in credit risk

This might be the case if the late payment was an administrative oversight which was subsequently rectified. Alternatively, the entity’s historical experience may indicate that the fact that amounts are more than 30 days past due does not provide evidence of a significant increase in the probability of default occurring, whereas amounts that are more than 60 days past due do. Significant increase in credit risk

It is expected that the 30-day rebuttable presumption will only be rebutted in limited situations. The 30-days past due is meant to act as a backstop indicator for when there has been a significant increase in credit risk. Significant increase in credit risk

IFRS 9 is clear that the 30-days past due test is not the only one to be applied if other information is readily available. Consequently, if credit risk management monitors forward-looking macro information, or that information is available without undue cost or effort, entities are required to take that information into account and cannot solely rely on past due information.

Therefore, even if information is not yet available on an individual loan by loan basis, entities should still group loans together based on shared risk characteristics such as instrument type, credit risk ratings, collateral type, date of initial recognition, remaining term to maturity, or by industry or by location, and provide for lifetime expected credit losses at portfolio level for those portfolios where the entity can identify a significant increase in credit risk. 

Example disclosure

IFRS Link

Explanation

IFRS 7(35F)(a)

IFRS 7(35G)(a)(ii)

Significant increase in credit risk

Significant increase in credit risk

Significant increase in credit risk

Significant increase in credit risk

Significant increase in credit risk

Significant increase in credit risk

The Group considers a financial instrument to have experienced a significant increase in credit risks (SICR) when one or more of the following quantitative, qualitative or backstop criteria have been met:

Quantitative criteria

Thresholds have been established to determine whether the remaining Lifetime probability of default (PD) at the reporting date has increased significantly compared to the residual Lifetime PD expected at the reporting date when the exposure was first recognised.

Qualitative criteria

For debt instruments securities, if the instrument meets one or more of the following criteria:

  • significant increase in credit spread;
  • significant adverse changes in business, financial and/or economic conditions in which the borrower operates;
  • actual or expected forbearance or restructuring;
  • actual or expected significant adverse change in operating results of the borrower; and
  • significant change in collateral value (secured facilities only) that is expected to increase risk of default.

The assessment of a SICR incorporates forward-looking information and is performed at the borrower level and on a periodic basis. The criteria used to identify a SICR are monitored and reviewed periodically for appropriateness by the independent Credit Risk team.

IFRS 7(35F)(a)(ii)

Backstop criteria

A backstop is applied and the debt financial instrument considered to have experienced a SICR if the borrower is more than 30-days past due on its contractual payments.

IFRS 7(35F)(a)(i)

Significant increase in credit risk

Significant increase in credit risk

Significant increase in credit risk

Significant increase in credit risk

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Low credit risk debt instruments

The insurer has used the low credit risk exemption for financial instruments when they meet the following conditions:

  • the financial instrument has a low risk of default;
  • the borrower is considered to have a strong capacity to meet its obligations in the near term; and
  • the insurer expects, in the longer term, that adverse changes in economic and business conditions might, but will not necessarily, reduce the ability of the borrower to fulfil its obligations.

The insurer defines low credit risk financial assets as financial assets that are “investment grade” at the reporting date, based on the insurer’s credit grading policies.

For such instruments, the SICR is not assessed, and the impairment allowance is calculated and the financial asset is measured using the 12 months expected credit losses (ECL), as long as the financial asset meets the criteria above.

Significant increase in credit risk

Significant increase in credit risk

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