Debt instruments at FVOCI – A debt instrument is classified as subsequently measured at fair value through other comprehensive income (FVOCI) under IFRS 9 if it meets both of the following criteria:
- Hold to collect and sell business model test: The asset is held withi n a business model whose objective is achieved by both holding the financial asset in order to collect contractual cash flows and selling the financial asset; and
- SPPI contractual cash flow characteristics test: The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
This business model typically involves greater frequency and volume of sales than the hold … Read more
IFRS 9 Impairment of Financial Instruments 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 ECL model 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
Expected credit losses are calculated by: IFRS 9 Impairment of Financial Instruments
- identifying scenarios in which a loan or receivable defaults; IFRS 9 Impairment of Financial Instruments
- estimating the cash shortfall that would be incurred in each scenario if a default were to happen;
The general approach is as the name more or less implies the ‘normal’ approach to calculate an impairment loss on financial assets (at amortised costs (for example trade receivables) or at the fair value OCI option), loan commitments and financial guarantee contracts (both not at FVPL), lease receivables and contract assets (with a significant financing component). These assets/commitments/contracts can also -by policy election- be impaired using the simplified approach. More regular trade receivables and contract assets without a significant financing component are mostly impaired using the simplified approach.
This is part of the expected credit losses in IFRS 9 Impairment of Financial Instruments
Identifying whether a significant increase in credit risk has occurred
A critical factor in applying … Read more
The credit adjusted approach applies only rarely when an entity acquires or originates a loan or receivable that is “credit impaired” at the date of its initial recognition (e.g., when a loan is acquired at a deep discount due to credit concerns via a business combination). The credit adjusted approach
This is part of the impairment of financial instruments in IFRS 9 Impairment of Financial Instruments.
An asset is credit impaired when one or more events that have a detrimental effect on the estimated future cash flows of the asset have occurred. The credit adjusted approach is one of three IFRS 9 approaches for measuring and recognising expected credit losses, the other two are the general approach… Read more
Change in the fair value of a bond – The following example illustrates the calculation that an entity might perform in accordance with the application guidance in IFRS 9 B5.7.18.
On 1 January 20X1 an entity issues a 10-year bond with a par value of CU150,0001 and an annual fixed coupon rate of 8 per cent, which is consistent with market rates for bonds with similar characteristics.
The entity uses LIBOR as its observable (benchmark) interest rate. At the date of inception of the bond, LIBOR is 5 per cent. At the end of the first year:
- LIBOR has decreased to 4.75 per cent.
- the fair value for the bond is CU153,811, consistent with an interest rate of
Possible indicators for Lifetime Expected Credit Loss – IFRS 9 sets out guidance (IFRS 9 B5.5.17) to assist entities in determining when a provision for lifetime expected credit losses is required. Entities may consider the following factors when making this determination:
- Significant changes in internal pricing indicators of credit risk for a particular financial instrument or similar financial instruments with the same term
- Other changes in the rates or terms of an existing financial instrument that would be significantly different if the instrument was newly originated or issued at the reporting date (such as more stringent covenants, increased amounts of collateral or guarantees, or higher income coverage) because of changes in the credit risk of the financial instrument
Loan commitments and financial guarantee contracts – Under IFRS 9, the scope of the three-stage impairment approach is extended to apply to such off-balance sheet items. An entity would consider the expected portion of the 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 when estimating lifetime expected credit losses (Stage 2).
No significant increase in credit risk
Simplified approach Trade receivables – Short term receivables
For trade receivables and contract assets (including lease receivables) that do not contain a significant financing component in accordance with IFRS 15 Revenue from Contracts with Customers (so generally trade receivables and contract assets with a maturity of 12 months or less), ‘lifetime expected credit losses’ (i.e. stage 2 loss allowance) are recognised. Because the maturities will typically be 12 months or less, the credit loss for 12-month and lifetime expected credit losses would be the same. Simplified approach Trade receivables
This approach also applies if the practical expedient in IFRS 15 for contracts that have a duration of one year or less is applied. Under this practical expedient, no … Read more