Summary Impairment Of Financial Assets – FAQ | IFRS

Summary impairment of financial assets

Summary impairment of financial assets is the centre text to quickly understand all IFRS aspects to recording loss allowances, when, how much, how often?

Impairment requirements

The impairment requirements are applied to: Summary impairment of financial assets

  • Financial assets measured at amortised cost (originated, purchased, reclassified or modified debt instruments incl. trade receivables),
  • Financial assets measured at fair value through other comprehensive income,
  • Loan commitments except those measured at fair value through profit or loss,
  • Financial guarantees contracts except those measured at fair value through profit or loss,
  • Lease receivables.

Impairment model

The impairment model follows a three-stage approach based on changes in expected credit losses of a financial instrument that determine:

  • The recognition of impairment, and Summary impairment of financial assets
  • The recognition of interest revenue. Summary impairment of financial assets

Initial recognition

At initial recognition of a financial asset, an entity recognises, as a standard approach, a loss allowance equal to 12-month expected credit losses. The actual loss does not need to take place within the 12 month period; it is the occurrence of the default event that ultimately results in that loss. An exception is purchased or originated credit impaired financial assets.

The first question – Increased credit risk since initial recognition?

If, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, a loss allowance for 12-month expected credit losses is recognised. In other words, the ‘general approach’ has two bases on which to measure expected credit losses; 12-month expected credit losses and lifetime expected credit losses. So as long as the credit risk has not increased since initial recognition (transaction by transaction), it is allowed to used the same rule of thumb for example a provision matrix (see below) based on ageing and type of customer, representing the 12-month expected credit losses. Summary impairment of financial assets

Summary impairment of financial assets

The second question – Which impairment approach is chosen?

The three stage approach is a more complicated model especially because of the forward looking and estimation elements towards expected credit losses and changes in credit risk. But actually the three stage approach will only be used in specific big(ger) data situation. In the three stage approach the general approach of calculating the 12-months ECL or lifetime ECL is many times the starting point.

For the majority of impairments of financial assets, IFRS 9 includes practical expedients and/or a simplified approach. These are, in short:

  • The 30 days past due rebuttable presumption: Summary impairment of financial assets

    • This is a rebuttable presumption that credit risk has increased significantly when contractual payments are more than 30 days past due,
    • When the payments are 30 days past due, a financial asset is considered to be in stage 2 and lifetime expected credit losses are recognised,
    • However an entity can rebut this presumption when it has reasonable and supportable information available that demonstrates that even if payments are 30 days or more past due, it does not represent a significant increase in credit risk of a financial asset.
  • Low credit risk financial assets:

    Summary impairment of financial assets

    • Assets that have a low risk of default and the counterparties have a strong capacity to repay (e.g. financial assets that are of investment grade),
    • Assets would remain in stage 1, and only 12 month expected credit losses are provided,
  • Simplified approach:

    Summary impairment of financial assets

    • Recognition of only Stage 2 ‘lifetime expected credit losses’,
    • Expected credit losses on trade receivables can be calculated using a provision matrix (e.g. geographical region, product type, customer rating, collateral or trade credit insurance, or type of customer),
    • Entities will need to adjust the historical provision rates to reflect relevant information about the current conditions and reasonable and supportable forecasts about future expectations,
  • Simplified approach for long term trade (and lease) receivables: Summary impairment of financial assets

    • Entities have a choice to either apply:
      • The three-stage approach of expected credit losses, or
      • The ‘simplified approach’ where only lifetime expected credit losses are recognised.

Defaulted instrument

The term ‘default’ is not defined in IFRS 9 and an entity will have to establish its own policy for what it considers a default, and apply a definition consistent with that used for internal credit risk management purposes for the relevant financial instrument. This should consider qualitative indicators (e.g. financial covenants) when appropriate.

Rebuttable presumption

IFRS 9 includes a rebuttable presumption that a default does not occur later than when a financial asset is 90 days past due unless an entity has reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate. The definition of default used for these purposes should be applied consistently to all financial instruments unless information becomes available that demonstrates that another default definition is more appropriate for a particular financial instrument.

Loan commitments and financial guarantee contracts

The three-stage approach of expected credit losses also applies to these off balance sheet financial items.

An entity considers the expected portion of a 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.

See also: The IFRS Foundation

Summary impairment of financial assets

Summary impairment of financial assets Summary impairment of financial assets Summary impairment of financial assets

Summary impairment of financial assets Summary impairment of financial assets Summary impairment of financial assets

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