Step 1 Define Default

Step 1 Define Default – 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. This is step 1 which started with an introduction in Impairment of investments and loans.

The objective of these approaches to expected credit losses or timely recording of impairments/loss allowances is to provide approaches that result in a situation in which very different reporting entities all can record estimates as objectively as possible. And in general record more prudent loss allowances than under IAS 39.

Step 1 Define Default You have to do it, there is no definition of ‘Default’ in IFRS. That provides entities the room to tailor the definition to their internal credit risk management practices and consider qualitative indicators of default in addition to days past due.

IFRS 9 includes a rebuttable presumption that default does not occur later than 90 days past due date of the asset unless the reporting entity has reasonable and supportable information to corroborate a more lagging default criterion.

Logical examples of qualitative indicators of default include:

  • credit worthiness of the counterparty and more importantly negative changes therein,
  • initiation of bankruptcy proceedings, although you might consider this to be recognised too late, the good or service has already been transferred,
  • breaches of covenants.

Be aware defining ‘Default’ is not science, it is a judgmental and subjective assessment of the financial fitness of an investment and loan portfolio, a single investment or a single loan.

Use a multi-criteria model for default risk assessment of counterparties, that incorporates value judgments and dealing with qualitative aspects. And it is more about the change in indicators over time than in just the current status of an indicator, is is getting worse, are only a few indicators getting worse and what is the answer you are receiving on questions after new orders are boarded.

Default assessment decisions are usually based on four types of information:

  • information of a commercial nature, related to the supplier-customer’s relationship history;
  • information of a financial nature, quantitatively assessed through some indicators;
  • information related to the customer’s management; and
  • information which mitigates the default risk (collateral and other guarantees).


On December 31, 2018, Entity A determines the credit risk of the loan has not increased significantly since initial recognition.

Entity A estimates that the loan has a 10% probability of default in the next 12 months.

Entity A calculates that $50 will be lost if the loan defaults. The $50 is calculated as the present value of the cash shortfalls expected over the life of the instrument if the default occurs in the next 12 months. The expectation is based on past experience updated for current conditions and forward-looking information.

12-month ECLs = $5 ($50 × 10%) which are the ECLs that result from default events on a financial instrument that are possible within the next 12 months.

2018 interest revenue = $30 (3% × $1,000) which is based on the effective interest rate applied to the gross carrying amount (which is the amortized cost before adjusting for any loss allowance).

Here are indicators of a possible default. After defining ‘Default’ go to Step 2 Decide to use the general or simplified approach

Or jump to:

Step 3 Define significant increase in credit riskStep 4 Define low credit riskStep 5 Allocate receivables to high and low credit riskStep 6 Apply the provision matrixStep 7 Measure expected credit losses

Step 1 Define Default

Step 1 Define Default Step 1 Define Default Step 1 Define Default Step 1 Define Default Step 1 Define Default provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit

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