IFRS 7 Credit risk disclosures – Credit risk is part of the risk disclosures requirements under IFRS 7 Financial Instruments: Disclosures.
Management should disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period [IFRS 7 31]. The disclosures require focus on the risks that arise from financial instruments and how they have been managed. These risks typically include, but are not limited to, credit risk, liquidity risk and market risk [IFRS 7 32].
Qualitative and quantitative disclosures are required. Management should therefore disclose, for each type of risk arising from financial instruments:
- The exposures to risk and how they arise, and its objectives, policies and processes for managing the risk and the methods used to measure the risk (qualitative disclosure) [IFRS 7 33]; and
- Summary quantitative data about its exposure to that risk at the end of the reporting period (quantitative disclosures) [IFRS 7 34].
If the quantitative data disclosed at the end of the reporting period is unrepresentative of an entity’s exposure to risk during the period, management should provide further information that is representative [IFRS 7 35].
IFRS 7 36 requires an entity to disclose information about its exposure to credit risk by class of financial instrument. Such disclosures include information on the credit quality of financial assets with credit risk.
IFRS 7 35A(a) requires investment entities to disclose an analysis of the age of financial assets (Trade receivables, contract assets and lease receivables) that are past due at the reporting date and on which lifetime expected credit losses are recognised (IFRS 9 5.5.15).
Financial asset is past due when a counterparty has failed to make a payment when contractually due. Past due therefore includes all financial assets that are one or more days overdue. Although IFRS 7 34(a) requires risk disclosures that are based on the information provided to key management personnel, there are also some minimum disclosure requirements defined by IFRS 7 (IFRS 7 36-42) that should always be disclosed, irrespective of how management monitors the risk.
However, the entity may take the way management monitors financial assets into account when defining the appropriate time bands used in the credit risk table. In the above scenario, it may disclose the amounts past due less than a month and amounts past due more than a month.
What amount should be disclosed to satisfy this requirement? Should this be:
- Only the amount past due (that is, the instalment not paid when contractually due);
- The whole balance that relates to the amount past due; or
- The whole balance that relates to the amount past due, including any other balances with the same debtor?
The investment entity should disclose the whole balance that relates to the amount past due.
Other associated balances to the same debtor should not be disclosed as past due but not impaired, as the debtor has not failed to make a payment on these when contractually due.
XXX = reconcile to the Statement of Financial position
Disclosures for collateral and other credit enhancements obtained
- Nature and carrying amount of collateral obtained
- When assets are not readily convertible to cash the policies for:
- disposing of such assets; or
- for using them in its operations
Disclosure of collateral and other credit enhancements held as security
- Policies and procedures for valuing, managing collateral
- Main types of counterparties to collateral and their creditworthiness
- Risk concentrations within collateral
Remember collateral is also a class based disclosure.
Extensive example credit risk disclosures
12(c) Credit risk
Credit risk arises from cash and cash equivalents, contractual cash flows of debt investments carried at amortised cost, at fair value through other comprehensive income (FVOCI) and at fair value through profit or loss (FVPL), favourable derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables. [IFRS 7 33(a),(b)]
(i) Risk management
Credit risk is managed on a group basis. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted. [IFRS 7 35B]
If wholesale customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal or external ratings in accordance with limits set by the board. The compliance with credit limits by wholesale customers is regularly monitored by line management. [IFRS 7 34 (c)]
Sales to retail customers are required to be settled in cash or using major credit cards, mitigating credit risk. There are no significant concentrations of credit risk, whether through exposure to individual customers, specific industry sectors and/or regions.
For derivative financial instruments, management has established limits so that, at any time, less than 10% of the fair value of favourable contracts outstanding are with any individual counterparty.
The group’s investments in debt instruments are considered to be low risk investments. The credit ratings of the investments are monitored for credit deterioration.
For some trade receivables the group may obtain security in the form of guarantees, deeds of undertaking or letters of credit which can be called upon if the counterparty is in default under the terms of the agreement.
(iii) Impairment of financial assets
The group has four types of financial assets that are subject to the expected credit loss model:
- trade receivables for sales of inventory and from the provision of consulting services
- contract assets relating to IT consulting contracts
- debt investments carried at amortised cost, and
- debt investments carried at FVOCI.
While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the identified impairment loss was immaterial.
Trade receivables and contract assets
The group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets. [IAS 1 117 , IFRS 7 21, IFRS 9 5.5.15]
To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. The contract assets relate to unbilled work in progress and have substantially the same risk characteristics as the trade receivables for the same types of contracts. The group has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets. [IFRS 7 35F(c)]
The expected loss rates are based on the payment profiles of sales over a period of 36 months before 31 December 2019 or 1 January 2019 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The group has identified the GDP and the unemployment rate of the countries in which it sells its goods and services to be the most relevant factors, and accordingly adjusts the historical loss rates based on expected changes in these factors. [IFRS 7 35G]
On that basis, the loss allowance as at 31 December 2019 and 31 December 2018 was determined as follows for both trade receivables and contract assets:
The loss allowances for trade receivables and contract assets as at 31 December reconcile to the opening loss allowances as follows: [IFRS 7 35H(b)(iii)]
Opening loss allowance at 1 January
Increase in loan loss allowance recognised in profit or loss during the year
Receivables written off during the year as uncollectible
Unused amount reversed
Closing loss allowance at 31 December
Trade receivables and contract assets are written off where there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the group, and a failure to make contractual payments for a period of greater than 120 days past due. [IFRS 7 35F(e)]
Impairment losses on trade receivables and contract assets are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item.
All of the entity’s debt investments at amortised cost and FVOCI are considered to have low credit risk, and the loss allowance recognised during the period was therefore limited to 12 months’ expected losses. Management consider ‘low credit risk’ for listed bonds to be an investment grade credit rating with at least one major rating agency. Other instruments are considered to be low credit risk where they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term. [IFRS 7 35F(a)(i)]
Other financial assets at amortised cost
Other financial assets at amortised cost include debenture assets, zero coupon bonds and listed corporate bonds, loans to related parties and key management personnel, and other receivables.[IAS1 117]
The loss allowance for other financial assets at amortised cost as at 31 December reconciles to the opening loss allowance as follows:
Debt investments at fair value through other comprehensive income
Debt investments at fair value through other comprehensive income (FVOCI) include listed and unlisted debt securities. The loss allowance for debt investments at FVOCI is recognised in profit or loss and reduces the fair value loss otherwise recognised in OCI. [IAS 1 117, IFRS 9 5.5.2]
(iv) Significant estimates and judgements
Impairment of financial assets
The loss allowances for financial assets are based on assumptions about risk of default and expected loss rates. The group uses judgement in making these assumptions and selecting the inputs to the impairment calculation, based on the group’s past history and existing market conditions, as well as forward-looking estimates at the end of each reporting period. Details of the key assumptions and inputs used are disclosed in the tables above. [IFRS 9 5.5.17, IAS 1 125]
(v) Net impairment losses on financial and contract assets recognised in profit or loss1
During the year, the following gains/(losses) were recognised in profit or loss in relation to impaired financial assets:
IFRS Reference: IAS 1 82(ba)
Of the above impairment losses, CU739,000 (2018 – CU607,000) relate to receivables arising from contracts with customers (see note 3). [IFRS 15 113(b)]
(vi) Financial assets at fair value through profit or loss
The entity is also exposed to credit risk in relation to debt investments that are measured at fair value through profit or loss. The maximum exposure at the end of the reporting period is the carrying amount of these investments (CU2,390,000; 2018 – nil). [IFRS 7 36]
See also: The IFRS Foundation