Professional Documents
Culture Documents
Financial Instruments
Part III: Impairment
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Agenda
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Financial
assets
measured at
amortised cost
Loan
commitments
and financial
guarantee
contracts not
measured at
FVTPL
Financial
assets
measured at
FVOCI
Lease
receivables
Scope
Trade
receivables
and contract
assets
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Overview of the
impairment requirements
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Stage 2
Stage 3
Impairment recognition
12-month
expected credit losses
Lifetime
expected credit losses
Lifetime
expected credit losses
Gross basis
Net basis
Performing
Under-performing
Non-performing
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Credit loss - difference between all contractual cash flows that are due to an entity in
accordance with the contract and all the cash flows that the entity expects to receive (ie
all cash shortfalls), discounted at the original effective interest rate (or credit-adjusted
effective interest rate for purchased or originated credit-impaired financial assets)
Expected credit losses (ECL) - weighted average of credit losses with the respective
risks of a default occurring as the weights
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Determining significant
increases in credit risk
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Change in credit risk over the life of the instrument - ie risk of a default
occurring (not changes in expected credit losses)
No definition of default, but rebuttable presumption that no later than 90 days past due
Maturity matters
Financial instruments that have low credit risk at the reporting date (eg
investment grade) may assume credit risk has not increased significantly
More than 30 days past due rebuttable presumption that credit risk has
increased significantly since initial consideration
Where default patterns are not concentrated at a specific point, changes in
risk of default over the next 12 months may be used if they are a reasonable
approximation of the changes in the lifetime risk of a default occurring
Expected credit losses are updated at each reporting date for new information
and changes in expectations even if deterioration is not significant
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Company C, is the holding company of a group that operates in a cyclical production industry.
The group structure is complex and has been subject to change, making it difficult for investors to analyse
the expected performance of the group and to forecast cash available at holding company level.
Bank B provided a loan to Company C when prospects for the industry were positive.
However, a potential decrease in sales was anticipated due to the point in the cycle.
At the time that Bank B originates the loan:
Creditors are concerned about Company Cs ability to refinance its debt.
Company Cs leverage was in line with that of other customers with similar credit risk.
Headroom on its coverage ratios before triggering a default is high.
On initial recognition, Bank B determines that the loan is subject to considerable credit risk, has
speculative elements and uncertainties affecting Company C including the groups uncertain
prospects for cash generation which could lead to default.
Loan not considered by Bank B to be originated credit-impaired.
Subsequent to initial recognition, Company C has announced that three of its five key subsidiaries
had a significant reduction in sales volume but were expected to improve in following months.
Sales of the other two subsidiaries were stable.
Company C announced a corporate restructure, which will increase the flexibility to refinance
existing debt and the ability of the operating subsidiaries to pay dividends to Company C.
Refer to Example 2 in paragraph IE12-IE17 of IFRS
9 Financial Instruments
*
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Company H owns real estate assets financed by a five-year loan from Bank Z.
Loan-to-value (LTV) ratio = 50%.
secured by a first-ranking security over the real estate assets.
At initial recognition, the loan is not considered to be originated credit-impaired.
As a result, Company Hs free cash flow is expected to be reduced to the point that the
coverage of scheduled loan payments could become tight. Bank Z estimates that a
further deterioration in cash flows may result in Company H missing a contractual
payment on the loan and becoming past due.
Recent third party appraisals have indicated a decrease in the value of the real estate
properties, resulting in a current LTV ratio of 70%.
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Bank ABC segments its mortgage portfolio on the basis of industries of borrowers employment
ie a shared credit risk characteristic
Refer to Example 5 in paragraph IE38 of IFRS 9
Financial Instruments
*
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Compare:
Risk of default at reporting date
(based on modified contractual
terms)
and
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Simplified approach for trade receivables, contract assets and lease receivables
Do not
contain
significant
financing
component
Contain
significant
financing
component
Trade
receivables
Trade receivables
and lease
receivables
Contract assets
within the scope
of IFRS 15
Loss allowance
= lifetime
expected credit
losses
(simplified
approach)
Contract assets
within the scope
of IFRS 15
Accounting policy
choice: simplified
approach or
monitor
significant
increase in credit
risk
Measurement of
expected credit losses
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ECL are a probability-weighted estimate of credit losses (ie the present value of all cash
shortfalls) over the expected life of the financial instrument:
Maximum period is the maximum contractual period of exposure to credit risk
o Include cash flows expected from collateral and other credit enhancements that are part of contractual terms
Current conditions
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Macroeconomic factors:
house price indexes, GDP, household debt ratios
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130 days
past due
3160 days
past due
6190 days
past due
Default rate
0.3%
1.6%
3.6%
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6.6%
10.6%
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Interest on gross
carrying amount if
financial assets no
longer creditimpaired
(Stages 1 and 2)
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Reclassified financial
assets
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Reclassification to
Fair value through
profit or loss
Fair value
through
profit or loss
Re
cla
ssi
fic
ati
on
fro
m
Amortised cost
Fair value
through OCI
Amortised
cost
Not applicable
financial assets
measured at
FVTPL do not
carry a loss
allowance
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Credit
CU490,000
CU490,000
CU4,000
Loss allowance
CU4,000
The impairment requirements apply to the bond from the reclassification date.
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Impairment
Determining whether there is a significant increase in credit risk
since initial recognition
Measurement of expected credit losses (ECL)
Determining whether loans will be paid as due and, if not, how much
might be recovered and when
Probability-weighting different scenarios
Disclosures
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Disclosures (IFRS 7)
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Objective: enable users of financial statements to understand the effect of credit risk on the amount,
timing and uncertainty of future cash flows
Quantitative
Qualitative
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Summary
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Yes
No
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Calculate a
credit-adjusted effective
interest rate and always
recognise a loss
allowance for changes
in lifetime expected
credit losses
No
Yes
No
Yes
No
No
Yes
Calculate
interest
revenue on
the gross
carrying
amount
Recognise 12-month
expected credit losses
and calculate interest
revenue on gross
carrying amount
And
No
Yes
Calculate interest
revenue on amortised
cost
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