When and how to recognise Expected Credit Losses

Under IFRS 9 expected credit losses are recognised from the point at which financial instruments are originated or purchased. There is no longer be a threshold (such as a trigger loss event of default) before expected credit losses would start to be recognised. With limited exceptions, a 12-month expected credit losses must be recognised initially for all assets subject to impairment. For example, an entity recognises a loss allowance at the initial recognition of a purchased debt instrumentContinue reading

Collateral in measurement of expected credit losses

In IFRS 9 collateral is a relevant factor in the measurement of expected credit losses.

In IFRS 9 the estimate of expected cash shortfalls is reflected by the cash flows expected from collateral and other credit enhancements that are integral to the instrument’s contractual terms. The estimate of expected cash shortfalls on a collateralized financial instrument reflects:

Determining significant increases in credit risk

The transition from recognising 12-month expected credit losses (i.e. Stage 1) to lifetime expected credit losses (i.e. Stage 2) in IFRS 9 Financial Instruments is based on the notion of a significant increase in credit risk over the remaining life of the instrument. The focus is on the changes in the risk of a default, and not the changes in the amount of expected credit losses. For example, for highly collateralised financial assets such as real estate backed … Continue reading

Measurement of expected credit losses

The measurement of expected credit losses is based on the present value of cash shortfalls, and takes into account both the amount and timing of contractual payments. Therefore a credit loss will arise in instances where there is a delay in the payment of contractually required amount, even if all contractual cash payments are ultimately expected to be received in full.

IFRS 9 Impairment of Financial Instruments

IFRS 9 establishes a new model for recognition and measurement of impairments in loans and receivables that are measured at Amortized Cost or FVOCI—the so-called “expected credit losses” model. This is the only impairment model that applies in IFRS 9 because all other assets are classified and measured at FVPL or, in the case of qualifying equity investments, FVOCI with no recycling to profit and loss.

Expected credit losses

The way to IFRS 9 Financial Instruments

In July 2014 the International Accounting Standards Board (IASB) published the 4th and final version of IFRS 9 Financial Instruments.

This was the conclusion of a major project started in 2002 as part of the Norwalk Agreement (WIKI) between the IASB and US Financial Accounting Standards Board (FASB) as a long term reform of financial instrument accounting.