IFRS 9 - Impairment

23 March 2018
Impairment – Scope
(IFRS 9 paragraph 5.5.1)
Within Scope
• Debt instruments classified
as AC or FVOCI
• Lease receivables (IAS 17),
trade receivables, and
contract assets (IFRS 15)
• Loan commitments and
financial guarantee
contracts that are not FVTPL
Out of Scope
• Equity instruments
• Loan commitments and
guarantees measured at
FVTPL
• Other financial instruments
measured at FVTPL
Impairment – New Model

Past events

Expected Credit Loss

(ECL) = Current conditions

PV of all cash shortfalls

over the expected life of Forecast of future
the financial instrument economic conditions
(B5.5.4)
Cash shortfall is the difference
between:
• The cash flows due to the entity in accordance
with the contract; and
• The cash flows that the entity expects to
receive.
A cash shortfall would arise even if the entity
expects to be paid in full but in a much later
date than is contractually due. (True or False)
Cash shortfall
A cash shortfall would arise even if the entity
expects to be paid in full but in a much later
date than is contractually due.

True (B5.5.28)
General Model – Dual Measurement
Approach
Under IFRS 9, impairment is measured as either:
• 12-month expected credit losses; or
• Lifetime expected credit losses
12-month ECL are all cash shortfalls that will result if a
default occurs in the 12 months after the reporting
date.
Lifetime ECL are the ECL that result from all possible
default events over the expected life of the financial
instrument.
Definition of “Default” (B5.5.37)
IFRS 9 does not define the term “default”, but
instead requires each entity to do so.
B5.5.37 states that an entity shall apply a default
definition that is consistent with the definition
used for internal credit risk management
purposes for the relevant financial instrument
and consider qualitative indicators when
appropriate.
Definition of “Default” (B5.5.37)
The definition of default used by an entity
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. (True or
False)
Definition of “Default” (B5.5.37)
The definition of default used by an entity 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.

True (B5.5.37)
When to use the 12-month ECL?
• Refer to the diagrams sent (IFRS 9 and KPMG)
• The 12-month ECL is used unless:
– The credit risk on a financial instrument has
increased significantly since initial recognition; or
– Special measurement requirements apply (credit-
impaired financial assets and simplified approach
for trade and lease receivables and contract
assets)
When to use the 12-month ECL?
For financial instruments that have significant
payment obligations only close to maturity,
the 12-month ECL may not be the appropriate
measure. (True or False)
When to use the 12-month ECL?
For financial instruments that have significant payment
obligations only close to maturity, the 12-month ECL
may not be the appropriate measure.

True (B5.5.14 – the 12-month ECL is not appropriate:

• For loans whose significant payment obligations are only after the next
12 months;
• When changes in the macroeconomic or other credit-related factors
occur that are not adequately reflected in the 12-month risk of default;
or
• When changes in the credit-related factors occur that have an impact on
credit risk that is more pronounced beyond 12-months )
Assessing whether credit risk has
increased significantly
An entity is required to undertake an
exhaustive search for information when
determining whether credit risk has increased
significantly since initial recognition. (True or
False)
Assessing whether credit risk has
increased significantly
An entity is required to undertake an exhaustive
search for information when determining
whether credit risk has increased significantly
since initial recognition.

False (B5.5.15). It provides a non-exhaustive list

of relevant information in B5.5.17.
Assessing whether credit risk has
increased significantly
In assessing whether credit risk has increased
significantly, an entity measures the change
in the magnitude of expected credit losses
between the current reporting date and
initial recognition. (True or False)
Assessing whether credit risk has
increased significantly
In assessing whether credit risk has increased
significantly, an entity measures the change in the
magnitude of expected credit losses between the
current reporting date and initial recognition.

False (IFRS 9 paragraph 5.5.9 – entity shall use the

change in the risk of a default occurring over the
expected life of the financial instrument.)
An entity compares the current risk of default at
the reporting date with the risk of default at
initial recognition. (Refer to KPMG Slide 45)
Assessing whether credit risk has
increased significantly
If the financial instrument is determined to
have low credit risk at reporting date, the
entity may assume that credit risk has not
increased significantly since initial
recognition. (True or False)
Assessing whether credit risk has
increased significantly
If the financial instrument is determined to have
low credit risk at reporting date, the entity
may assume that credit risk has not increased
significantly since initial recognition.

True (IFRS 9 paragraph 5.5.10)

Assessing whether credit risk has
increased significantly
How often does an entity assess whether credit
risk has significantly increased?
Assessing whether credit risk has
increased significantly
How often does an entity assess whether credit
risk has significantly increased?

At each reporting date according to IFRS 9

paragraph 5.5.9.
Assessing whether credit risk has
increased significantly
There is a rebuttable presumption that the
credit risk on a financial asset has increased
significantly since initial recognition when
contractual payments are more than 30 days
past due. (True or False)
Assessing whether credit risk has
increased significantly
There is a rebuttable presumption that the credit
risk on a financial asset has increased significantly
since initial recognition when contractual
payments are more than 30 days past due.

True (IFRS 9 paragraph 5.5.11. This can be

rebutted when there is reasonable and
supportable information available
that…B5.5.20)
Assessing whether credit risk has
increased significantly
The impairment model in IFRS 9 is symmetrical
and financial assets can move into and out of
the lifetime ECL category. (True or False)
Assessing whether credit risk has
increased significantly
The impairment model in IFRS 9 is symmetrical
and financial assets can move into and out of
the lifetime ECL category.

True (Refer to KPMG slide 35)

Assessing whether credit risk has
increased significantly
For loan commitments and financial guarantee
contracts, the assessment of whether there is
significant increase in credit risk is made
when the contract was signed rather than
when the balance was drawn. (True or False)
Assessing whether credit risk has
increased significantly
For loan commitments and financial guarantee
contracts, the assessment of whether there is
significant increase in credit risk is made when
the contract was signed rather than when the
balance was drawn.

True (IFRS 9 paragraph 5.5.6)

Assessing whether credit risk has
increased significantly
An entity may apply various approaches when
assessing if there has been a significant
increase in credit risk, including using
different approaches for different financial
instruments. (True or False)
Assessing whether credit risk has
increased significantly
An entity may apply various approaches when
assessing if there has been a significant increase
in credit risk, including using different approaches
for different financial instruments.

True (B5.5.12 – Any approach used considers:

• The change in the risk of default occurring since initial recognition;
• The expected life of the financial instrument; and
• Reasonable and supportable information that is available without
undue cost or effect that may affect credit risk.)
Assessing whether credit risk has
increased significantly
An entity can assess significant increase in
credit risk on a collective basis by grouping
financial instruments on the basis of shared
credit risk characteristics. (True or False)
Assessing whether credit risk has
increased significantly
An entity can assess significant increase in credit
risk on a collective basis by grouping financial
instruments on the basis of shared credit risk
characteristics.

True (B5.5.5 – Examples of shared credit risk

characteristics include…)
Assessing whether credit risk has
increased significantly
The risk of a default occurring on an AAA-rated
bond with an expected life of 10 years is
lower than that on an AAA-rated bond with
an expected life of 5 years. (True or False)
Assessing whether credit risk has
increased significantly
The risk of a default occurring on an AAA-rated
bond with an expected life of 10 years is lower
than that on an AAA-rated bond with an
expected life of 5 years.

False (B5.5.10)
Assessing whether credit risk has
increased significantly
For comparison purpose, the aggregation of
financial instruments cannot change over
time. (True or False)
Assessing whether credit risk has
increased significantly
For comparison purpose, the aggregation of
financial instruments cannot change over
time.

False (B5.5.6)
IFRS 9 states that the credit risk is low
if: (B5.5.22)
• The instrument has a low risk of default;
• The borrower has a strong capacity to meet its
contractual cash flow obligations in the near
term; and
• Adverse changes in economic and business
conditions in the longer term may, but will not
necessarily, reduce the borrower’s ability to
fulfill its obligation.
Low credit risk financial instruments
Financial instruments that are backed by
collateral and that have relatively lower risk
of default compared to entity’s other
financial instruments are considered to have
low credit risk at reporting date. (True or
False)
Low credit risk financial instruments
Financial instruments that are backed by
collateral and that have relatively lower risk of
default compared to entity’s other financial
instruments are considered to have low credit
risk at reporting date.

False (B5.5.22)
Low credit risk financial instruments
To determine whether a financial instrument
has low credit risk, the financial instrument
has to be externally rated. (True or False)
Low credit risk financial instruments
To determine whether a financial instrument has
low credit risk, the financial instrument has to be
externally rated.

False (B5.5.23 – Financial instruments are not

required to be externally rated but entity can
use its internal credit risk ratings or other
methodologies that are consistent with globally
understood definition of low credit risk and that
consider the risks and the type of financial
instruments that are being assessed.)
Modified financial assets (B5.5.25 to
B5.5.27)
• Refer to the diagram sent (KPMG)
• If the modification does not result in
derecognition, then the subsequent
assessment of whether there is a significant
increase in credit risk is made by comparing:
– The risk of default at the reporting date based on
the modified contractual terms of the FA; and
– The risk of default at initial recognition based on
the original, unmodified contractual terms of the
FA.
Measurement of ECL should reflect:
• An unbiased and probability-weighted amount
(B5.5.41 to B5.5.43);
• The time value of money (B5.5.44 to B5.5.48);
and
• Reasonable and supportable information that
is available without undue cost or effort
(B5.5.49 to B5.5.54)
• CFs expected from collateral and other credit
enhancements that are part of the contractual
terms should be considered (B5.5.55)