Applying IFRS Impairment of financial instruments under IFRS 9 April 2018 Contents In this issue: 1 Introduction ........................................................................... 6 1.1 Brief history and background of the impairment project .......................................................................... 6 1.2 Overview of IFRS 9 impairment requirements .................... 9 1.3 Key changes from the IAS 39 impairment requirements and the impact and implications ................. 11 1.4 Key differences from the FASB’s standard ....................... 13 1.5 The IFRS Transition Resource Group for Impairment of Financial Instruments (ITG) and IASB webcasts ............ 14 1.6 Other guidance on expected credit losses ........................ 17 2 Scope .................................................................................. 18 3 Approaches .......................................................................... 18 3.1 General approach ......................................................... 19 3.2 Simplified approach ...................................................... 21 3.3 Purchased or originated credit-impaired financial assets ......................................................................... 23 4 Measurement of expected credit losses ................................... 25 4.1 Definition of default ...................................................... 26 4.2 Lifetime expected credit losses ...................................... 26 4.3 12-month expected credit losses .................................... 27 4.4 Probability of default (PD) and loss rate approaches ......... 29 4.4.1 Probability of default (PD) approach .................... 30 4.4.2 Loss rate approach ............................................ 33 4.5 Expected life versus contractual period ........................... 35 4.6 Probability-weighted outcome and multiple scenarios ..................................................................... 38 4.7 Time value of money ..................................................... 43 4.8 Losses expected in the event of default........................... 45 4.8.1 Credit enhancements: collateral and financial guarantees .......................................... 45 4.8.2 Cash flows from the sale of a defaulted loan ......... 50 4.9 Reasonable and supportable information ........................ 51 4.9.1 Undue cost or effort .......................................... 51 4.9.2 Sources of information ...................................... 52 1 April 2018 Impairment of financial instruments under IFRS 9 4.9.3 Information about past events, current conditions and forecasts of future economic conditions ........................................................ 52 5 General approach: determining significant increases in credit risk ............................................................................ 57 5.1 Change in the risk of a default occurring ......................... 58 5.1.1 Impact of collateral, credit enhancements and financial guarantee contracts ....................... 60 5.1.2 Contractually linked instruments (CLIs) and subordinated interests ....................................... 62 5.1.3 Determining change in the risk of a default under the loss rate approach .............................. 63 5.2 Factors or indicators of changes in credit risk .................. 63 5.2.1 Examples of factors or indicators of changes in credit risk ..................................................... 64 5.2.2 Past due status and more than 30 days past due rebuttable presumption ............................... 67 5.2.3 Illustrative examples of assessing significant increases in credit risk ....................................... 68 5.2.4 Use of behavioural factors ................................. 73 5.3 What is significant? ....................................................... 74 5.4 Operational simplifications ............................................ 76 5.4.1 Low credit risk operational simplification ............. 76 5.4.2 Delinquency ...................................................... 81 5.4.3 12-month risk as an approximation for change in lifetime risk ........................................ 82 5.4.4 Assessment at the counterparty level .................. 84 5.4.5 Determining maximum initial credit risk for a portfolio ........................................................... 85 5.5 Collective assessment ................................................... 88 5.5.1 Example of individual assessment of changes in credit risk ......................................... 89 5.5.2 Basis of aggregation for collective assessment ...................................................... 90 5.5.3 Example of collective assessment (‘bottom up’ and ‘top down’ approach) .............................. 92 5.6 Determining the credit risk at initial recognition of an identical group of financial assets .............................. 95 5.7 Multiple scenarios for the assessment of significant increases in credit risk .................................................. 96 6 Other matters and issues in relation to the expected credit loss calculations .......................................................... 98 6.1 Basel guidance on accounting for expected credit losses .......................................................................... 98 6.2 Global Public Policy Committee (GPPC) guidance ........... 102 2 April 2018 Impairment of financial instruments under IFRS 9 6.3 Measurement dates of expected credit losses ................ 103 6.3.1 Date of derecognition and date of initial recognition ..................................................... 103 6.3.2 Trade date and settlement date accounting........ 104 6.4 Interaction between the initial measurement of debt instruments acquired in a business combination and the impairment model of IFRS 9 ................................... 105 6.5 Interaction between expected credit losses calculations and fair value hedge accounting ................. 106 7 Modified financial assets ...................................................... 107 7.1 Accounting treatment if modified financial assets are derecognised ........................................................ 107 7.2 Accounting treatment if modified financial assets are not derecognised .................................................. 107 8 Financial assets measured at fair value through other comprehensive income ........................................................ 110 8.1 Accounting treatment for debt instruments measured at fair value through other comprehensive income ...................................................................... 110 8.2 Interaction between foreign currency translation, fair value hedge accounting and impairment .................. 111 9 Trade receivables, contract assets and lease receivables ........ 119 9.1 Trade receivables and contract assets .......................... 119 9.2 Lease receivables ....................................................... 120 10 Loan commitments and written financial guarantee contracts ........................................................................... 121 11 Revolving credit facilities ..................................................... 127 11.1 Scope of the exception ................................................ 127 11.2 The period over which to measure expected credit losses ........................................................................ 130 11.3 Exposure at default (EAD) ............................................ 137 11.4 Time value of money ................................................... 138 11.5 Determining significant increase in credit risk ................ 139 12 Intercompany loans ............................................................ 140 13 Presentation of expected credit losses in the statement of financial position ................................................................ 144 13.1 Allowance for financial assets measured at amortised cost, contract assets and lease receivables ................................................................ 144 3 April 2018 Impairment of financial instruments under IFRS 9 13.1.1 Write-off ........................................................ 145 13.1.2 Presentation of the gross carrying amount and expected credit loss allowance for credit-impaired assets ..................................... 146 13.2 Provisions for loan commitments and financial guarantee contracts ................................................... 149 13.3 Accumulated impairment amount for debt instruments measured at fair value through other comprehensive income ................................................ 150 14 Disclosures ........................................................................ 150 14.1 Introduction ............................................................... 150 14.2 Scope and objectives .................................................. 150 14.3 EDTF recommendations on ECL disclosures for banks ........................................................................ 151 14.4 Credit risk management practices ................................ 151 14.5 Quantitative and qualitative information about amounts arising from expected credit losses ................. 155 14.5.1 Changes in the loss allowance and the gross exposures ...................................................... 155 14.5.2 Modifications ................................................... 161 14.5 3. Collateral and other credit enhancements .......... 161 14.6 Credit risk