The IASB introduced its expected credit loss (ECL) model for measuring impairment of financial instruments with the publication of IFRS 9 in July 2014. It effective date is 1 January 2018, with early adoption permitted.
IFRS 9 calls for application of the expected credit loss model and is required of all entities for all credit exposures not measured at FVTPL (i.e., financial assets measured at amortized cost and at FVTOCI). Equity securities are excluded from impairment requirements. IFRS 9 is forward looking, requiring projection of probable future impairment based on changes in an asset’s expected credit losses.
The financial instruments in the scope of the IFRS 9 are:
- Financial assets that are debt instruments measured at amortized cost or fair value through other comprehensive income (FVOCI), including loans, trade receivables and debt securities;
- Loan commitments that are not measured at fair value through profit or loss (FVTPL);
- Financial guarantee contracts within the scope of IFRS 9 that are not measured at FVTPL;
- Lease receivables in the scope of IAS 17/IFRS 16 Leases; and
- Contract assets in the scope of IFRS 15 Revenue from Contracts with Customers.
| Accounting for Impairment of Financial Asset at Amortized Cost (Example) | ||||
| Par value: €5,000,000 Coupon: 5% annual Market rate on 31 Dec 16: 6% Fair value on 31 Dec 16: €4,826,700 | ||||
| 31 Dec 16 | Impairment Loss* | 671,000 | ||
| Loss Allowance | 671,000 | |||
| Interest Revenue | 216,500 | |||
| Interest Receivable† | 216,500 | |||
| To recognize impairment loss and revenue on 31 Dec 2016 | ||||
| * €5,000,000 - 4,329,000 (Carrying Value − PVECF) | ||||
| † €4,329,000 x 5% (PVECF x Original DF) | ||||
An expected credit loss (ECL) is the expected impairment of a loan, lease or other financial asset based on changes in its expected credit loss either over a 12-month period or its lifetime:
- 12-month expected credit losses (12-month ECL) – Expected credit losses resulting from financial instrument default events that are possible within 12 months after the reporting date; or
- Full lifetime expected credit losses (lifetime ECL) – Expected credit losses resulting from all possible default events over the life of the financial instrument.
With the exception of purchased or originated credit impaired financial assets, expected credit losses are to be measured through a loss allowance.
At the initial recognition of a financial asset, an entity recognizes a loss allowance equal to the expected credit losses from the entity’s reporting date, unless it is a purchased or originated credit-impaired financial assets. Entities may also assume that the criteria to recognize lifetime ECL have not been met if a financial asset has low credit risk at the reporting date.
| Accounting for the ECL of a Financial Asset at FVTOCI (Example) | ||||||
| ||||||
| 15 Dec 16 | Financial Asset (FVTOCI) | 1,000 | ||||
| Cash | 1,000 | |||||
| To record financial asset at fair value at 15 Dec 2016 | ||||||
| 31 Dec 16 | Impairment Loss (12-Month ECL) | 30 | ||||
| Other Comprehensive Income | 20 | |||||
| Financial Asset (FVTOCI) | 50 | |||||
| To recognize 12-Mo. ECL and FV changes 31 Dec 2016 | ||||||
The general approach under IFRS 9 requires the recognition of 12-month ECL or lifetime ECL if there has been a “significant increase” in credit risk since initial recognition of a particular instrument. The amount of ECL recognised calls for judgement to define “significant” in the context of their specific products and is based on an increased probability of default since initial recognition.