Step 4 Define low credit risk

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 4 which started with an introduction in Impairment of investments and loans. Step 4 Define low credit risk

An entity may assume that credit risk has not increased significantly if a loan or receivable is determined to have a ‘low credit risk‘ profile at the reporting date; e.g., the risk of default is low (i.e. not a poor default risk rating), the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. Step 4 Define low credit risk

An example of a loan that has a low credit risk is one that has an external “investment grade” rating. An entity may use internal credit ratings or other methodologies to identify whether an instrument has a low credit risk, subject to certain criteria. Step 4 Define low credit risk

The low credit risk exemption will be a useful simplification for debt securities that are rated externally because entities can apply investment ratings provided by Moody’s (equivalent to or better than Baa3) or Standard & Poor’s or Fitch (equivalent to or better than BBB-). Step 4 Define low credit risk

After defining ‘Low credit risk’ go to Step 5 Allocate receivables to high and low credit risk

Or jump to:

Step 1 Define DefaultStep 2 Decide to use the general or simplified approachStep 3 Define significant increase in credit risk, Step 6 Apply the provision matrixStep 7 Measure expected credit losses

Step 4 Define low credit risk Step 4 Define low credit risk Step 4 Define low credit risk

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