Summary impairment of financial assets

The impairment requirements are applied to:

The impairment model follows a three-stage approach based on changes in expected credit losses of a financial instrument that determine:

Initial recognition

At initial recognition of a financial asset, an entity recognises, as a standard approach, a loss allowance equal to 12-month expected credit losses. The actual loss does not need to take place within the 12 month period; it is the occurrence of the default event that ultimately results in that loss. An exception is purchased or originated credit impaired financial assets.

Short cuts to impairment of financial assets:

The three stage approach is a more complicated model especially because of the forward looking and estimation elements towards expected credit losses and changes in credit risk. But actually the three stage approach will only be used in specific big(ger) data situation.

For the majority of impairments of financial assets, IFRS 9 includes practical expedients and/or a simplified approach. These are, in short:

  • The 30 days past due rebuttable presumption:
    • This is a rebuttable presumption that credit risk has increased significantly when contractual payments are more than 30 days past due,
    • When the payments are 30 days past due, a financial asset is considered to be in stage 2 and lifetime expected credit losses are recognised,
    • However an entity can rebut this presumption when it has reasonable and supportable information available that demonstrates that even if payments are 30 days or more past due, it does not represent a significant increase in credit risk of a financial asset.
  • Low credit risk financial assets:
    • Assets that have a low risk of default and the counterparties have a strong capacity to repay (e.g. financial assets that are of investment grade),
    • Assets would remain in stage 1, and only 12 month expected credit losses are provided,
  • Simplified approach:
    • Recognition of only Stage 2 ‘lifetime expected credit losses’,
    • Expected credit losses on trade receivables can be calculated using a provision matrix (e.g. geographical region, product type, customer rating, collateral or trade credit insurance, or type of customer),
    • Entities will need to adjust the historical provision rates to reflect relevant information about the current conditions and reasonable and supportable forecasts about future expectations,
  • Simplified approach for long term trade (and lease) receivables:
    • Entities have a choice to either apply:
      • The three-stage approach of expected credit losses, or
      • The ‘simplified approach’ where only lifetime expected credit losses are recognised.

Loan commitments and financial guarantee contracts

The three-stage approach of expected credit losses also applies to these off balance sheet financial items.

An entity considers the expected portion of a loan commitment that will be drawn down within the next 12 months when estimating 12 month expected credit losses (stage 1), and the expected portion of the loan commitment that will be drawn down over the remaining life of the loan commitment.

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