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IFRS 9 – Day 2 Session 7
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
IMPAIRMENT- - - - - - - - - - - - - -...
Contents - Impairment
1. Overview
2. Scope
3. Expected Credit Loss model
4. Measurement of ECL
5. Simplified approach
6. B...
1. Overview
Welcome to the Dark Side
Impairment Project Timeline
4
November
2009:
IASB issues ED
on impairment
May 2010:
FASB issues ED
covering all
aspects of...
IASB General Approach
Expected Credit Losses are required to be measured
through a Loss Allowance at an amount for each
Fi...
New ECL model
An entity shall recognize a loss allowance for expected
credit losses on a financial asset that is measured ...
General Comments
Impairment requirements may seem to be
over-engineered
Many industries >> it is a fairly simple
procedure...
Two controversies
Have individual assets been reviewed.?
A question remains
How to deal with fluctuations/losses on
equity...
Review of Assets
Each and every period:
Is there objective evidence of impairment?
What type of evidence are we considerin...
Review of Assets
Each and every period:
Is there objective evidence of impairment?
What type of evidence are we considerin...
Review of Assets
Each and every period:
Is there objective evidence of impairment?
What type of evidence are we considerin...
Possible Loss Events include:
1. Financial difficulty of the issuer or obligor
What type of evidence are we considering?
2...
Time-value of money
This is the Risk-free rate
And is usually tied to a published rate
This rate may fluctuate out-of-sync...
Unintended consequences
There are new risks to be dealt with
- Mistakes (Staff need training)
Judgment:
- Fraud Opportunit...
Impairment
IFRS 9 requires an impairment allowance against the amortized
cost of financial assets held at amortized cost o...
Impairment
IFRS 9 requires an impairment allowance against the amortized
cost of financial assets held at amortized cost o...
Impairment
IFRS 9 requires an impairment allowance against the amortized
cost of financial assets held at amortized cost o...
Impairment
IFRS 9 requires an impairment allowance against the amortized
cost of financial assets held at amortized cost o...
Phase 2: Impairment (1)
2008 Financial crisis:
the delayed recognition of credit losses on loans (and other
financial inst...
Impairment (2)
IFRS 9 requires an impairment allowance against the
amortized cost of financial assets held at amortized co...
Impairment (3)
When an asset is acquired an impairment allowance is
- measured = PV of ECL from default events
- projected...
Impairment (3)
Changes in this allowance are reported in PoL
When an asset is acquired an impairment allowance is
- measur...
Impairment (3)
Changes in this allowance are reported in PoL
When an asset is acquired an impairment allowance is
- measur...
Impairment (4)
If there is a significant increase in credit risk, the allowance is
measured as the PV of all ECL projected...
Impairment (4)
If there is a significant increase in credit risk, the allowance is
measured as the PV of all ECL projected...
Impairment (IFRS vs FASB)
Under both IFRS 9 and the FASB model there will be a loss
assessed when assets are acquired to t...
Impairment (IFRS vs FASB)
Under both IFRS 9 and the FASB model there will be a loss
assessed when assets are acquired to t...
Impairment (IFRS vs FASB)
Under both IFRS 9 and the FASB model there will be a loss
assessed when assets are acquired to t...
Impairment (IFRS vs FASB)
Under both IFRS 9 and the FASB model there will be a loss
assessed when assets are acquired to t...
PwC
Impairment
Estimating expected losses under
FASB and IASB models
30
• Both the credit deterioration model and the CECL...
PwC
Impairment
The FASB’s current expected credit loss (CECL)
model
31
• After deciding not to move forward with the ‘thre...
2. Scope
Welcome to the Dark Side
Scope - included
• investments in debt instruments measured at amortized cost
B4.1.10
• investments in debt instruments me...
Scope
During the financial crisis, the delayed recognition of credit losses
on loans (and other financial instruments) was...
3. Expected Credit Loss Model (ECL)
Welcome to the Dark Side
Let me tell you a story – once upon a
time there was a standa...
ECL – example (1)
Along comes IFRS 9
Your neighbor offers service to Oil Companies
Oil prices slump
Under IFRS 9 we have t...
ECL - 3 stage model
Definition of buckets
1. 12mth ECL
The triggering Default event will happen in next 12 mths
Definition of buckets
2. Lifetime ECL
The default event will happen sometime within the life
of the loan
1. 12mth ECL
The ...
Definition of buckets
2. Lifetime ECL
The default event will happen sometime within the life
of the loan
1. 12mth ECL
The ...
4. Measurement of ECL (1) - Initial
Because future macroeconomic outlooks are important
to assess the creditworthiness of ...
4. Measurement of ECL (2) – stage 2
If, at any time, the credit quality of the exposure has
significantly deteriorated:
th...
4. Measurement of ECL (3) – stage 3
If, at any time, the credit quality of the exposure
becomes Non-performing
Lifetime EC...
Impairment
IFRS 9 requires an impairment allowance against the amortized
cost of financial assets held at amortized cost o...
Phase 2: Impairment (1)
2008 Financial crisis:
the delayed recognition of credit losses on loans (and other
financial inst...
Phase 2: Impairment (1)
2008 Financial crisis:
the delayed recognition of credit losses on loans (and other
financial inst...
Phase 2: Impairment (1)
2008 Financial crisis:
the delayed recognition of credit losses on loans (and other
financial inst...
Impairment (2)
IFRS 9 requires an impairment allowance against the
amortized cost of financial assets held at amortized co...
Impairment (2)
IFRS 9 requires an impairment allowance against the
amortized cost of financial assets held at amortized co...
Impairment (2)
IFRS 9 requires an impairment allowance against the
amortized cost of financial assets held at amortized co...
Impairment (3)
When an asset is acquired an impairment allowance is
- measured = PV of ECL from default events
- projected...
Impairment (3)
Changes in this allowance are reported in PoL
When an asset is acquired an impairment allowance is
- measur...
Impairment (3)
Changes in this allowance are reported in PoL
When an asset is acquired an impairment allowance is
- measur...
Impairment (4)
If there is a significant increase in credit risk, the allowance is
measured as the PV of all ECL projected...
Impairment (4)
If there is a significant increase in credit risk, the allowance is
measured as the PV of all ECL projected...
5. Simplified Approach
1. Trade Receivables and Contract assets
2. That do not have a significant financing component
3. e...
5. Simplified Approach
1. Trade Receivables and Contract assets
2. That do not have a significant financing component
3. e...
5. Simplified Approach
1. Trade Receivables and Contract assets
2. That do not have a significant financing component
3. e...
Purchase of Credit Impaired
A financial asset is considered credit-impaired on purchase if there is
evidence of impairment...
Purchase of Credit Impaired
A financial asset is considered credit-impaired on purchase if there is
evidence of impairment...
Purchase of Credit Impaired
A financial asset is considered credit-impaired on purchase if there is
evidence of impairment...
Low Risk Credit Impaired
If credit risk is low at reporting date,
you do not have to assess if increase in CR has occurred...
Low Risk Credit Impaired
If credit risk is low at reporting date,
you do not have to assess if increase in CR has occurred...
Low Risk Credit Impaired
If credit risk is low at reporting date,
you do not have to assess if increase in CR has occurred...
Low Risk Credit Impaired
If credit risk is low at reporting date,
you do not have to assess if increase in CR has occurred...
Impairment
Flowchart
6. Basel
Basel is a comprehensive set of reform measures, developed
by the Basel Committee on Banking Supervision, to
stre...
6. Basel
Basel is a comprehensive set of reform measures, developed
by the Basel Committee on Banking Supervision, to
stre...
IFRS & BASEL
IFRS – IAS 39
Incurred Loss Model
ILM
Disclose losses incurred
at BS date
BASEL III
Expected Loss Model
ELM
A...
BASEL - Expected Loss
What is the
probability
of debtor
default?
ECL=PD EAD x LGDx
What is our
exposure?
How much
loss?
1....
7. Recognition Impairment (FV_PoL)
Best by an example discussion
Information to consider
when measuring ECL
The standard establishes that management should measure ECL’s
over the remainin...
Information to consider
when measuring ECL
The standard establishes that management should measure ECL’s
over the remainin...
Credit Risk Characteristics
Examples of shared credit risk characteristics might include,
(but are not limited to):
a. the...
Recognising FV_OCI
If there is a significant increase in credit risk, the allowance is
measured as the PV of all ECL proje...
Recognising FV_OCI
If there is a significant increase in credit risk, the allowance is
measured as the PV of all ECL proje...
Example: FV_OCI
Entity buys 5% 10yr bond at FV = $1,000 on Dec 12,2015 and
wishes to use FV_OCI
Asset
Dr 1,000,000
Cash
1,...
Example: FV_OCI (2)
On Dec 31, 2015 FV = $950.
Entity determines increase in Credit Risk and 12mth ECL = $30
Asset
PoL
2.0...
Example: FV_OCI (2)
On Dec 31, 2015 FV = $950.
Entity determines increase in Credit Risk and 12mth ECL = $30
Asset
Dr 30
P...
Example: FV_OCI (3)
On Jan 1, 2016, sell for $950 cash
Dr Cash 950
Cr Asset 950
Dr PoL 20
Cr OCI 20
Asset
Dr 30
PoL50 Cr
2...
Example: FV_OCI (3)
On Jan 1, 2016, sell for $950 cash
Dr Cash 950
Cr Asset 950
Dr PoL 20
Cr OCI 20
Asset
Dr 30
PoL50 Cr
2...
8. Loss-rate approach
9. Loss-rate approach
Top-down is there for entities who do not have the individual
information available
Less sophisticat...
Presentation
Present interest revenue in the statement of OCI as a separate
line item
Presentation
Present interest revenue in the statement of OCI as a separate
line item
Recognize ECL in the Statement of Fi...
Presentation
Present interest revenue in the statement of OCI as a separate
line item
Recognize ECL in the Statement of Fi...
9. Where the US Diverges
FASB CECL model
Current Expected Loss Model
After deciding not to move forward with the ‘3 bucket’ model,
FASB developed -...
FASB CECL model
Current Expected Loss Model
After deciding not to move forward with the ‘3 bucket’ model,
FASB developed -...
FASB CECL model
Current Expected Loss Model
After deciding not to move forward with the ‘3 bucket’ model,
FASB developed -...
Estimating ECL - FASB and IASB models
• Both the credit deterioration model and the CECL model focus
on an expected value ...
US GAAP not converging
In the beginning – Joint project
3 stage approach lacked support in US
FASB developed a single meas...
10. Transition
This standard will be very challenging to apply, in particular for
financial institutions
10. Transition
This standard will be very challenging to apply, in particular for
financial institutions
Currently, most e...
10. Transition
This standard will be very challenging to apply, in particular for
financial institutions
Currently, most e...
10. IFRS Transition
For Annual periods beginning after 2018 Jan 1
Can use the simplified approach initially (Lifetime ECL ...
IS YOUR LIFE
NOW CHANGED?
The End
Questions?
99
CliffB
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ifrs 09 impairment, impairment, Investment impairment,

  1. 1. IFRS 9 – Day 2 Session 7 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - IMPAIRMENT- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
  2. 2. Contents - Impairment 1. Overview 2. Scope 3. Expected Credit Loss model 4. Measurement of ECL 5. Simplified approach 6. Basel models 7. Recognition of impairment losses (at FV_OCI) 8. Using a loss allowance 9. Where US GAAP diverges
  3. 3. 1. Overview Welcome to the Dark Side
  4. 4. Impairment Project Timeline 4 November 2009: IASB issues ED on impairment May 2010: FASB issues ED covering all aspects of financial instrument accounting January 2011: FASB and IASB issue supplementary document on impairment Q4 2012: FASB exposes the CECL model August 2012: FASB decides not to move forward with ‘3 bucket’ model and instead explore new model Q1-Q2 2012: Re-deliberations continue with a ‘three bucket’ impairment model Q1 2013: IASB exposes the ‘credit deterioration’ model (amended version of the ‘3 bucket’ model)/FASB publishes FAQ explaining its CECL model 11/09 5/10 Q1/12 8/12 Q4/12 Q1/13 7/14 July 2014: FASB issues IFRS 9 1/11 Implement 1/2018
  5. 5. IASB General Approach Expected Credit Losses are required to be measured through a Loss Allowance at an amount for each Financial Instrument Objectives of the IASB – to be: • Consistent • Universally applicable • Clear ECL_Lifetime = PV cash shortfalls over Life of Instrument
  6. 6. New ECL model An entity shall recognize a loss allowance for expected credit losses on a financial asset that is measured as FAAC or FAFV_OCI, A lease receivable, a contract asset or a loan commitment and a financial guarantee. The new impairment model establishes a 3-stage approach, based on changes in expected credit losses of a financial instrument. This determines the recognition of impairment (as well as the recognition of interest revenue).
  7. 7. General Comments Impairment requirements may seem to be over-engineered Many industries >> it is a fairly simple procedure Provide for bad and doubtful debts Different and ‘hard to reconcile’ views have emerged It has taken >10 years of research and discussion This is the result
  8. 8. Two controversies Have individual assets been reviewed.? A question remains How to deal with fluctuations/losses on equity instruments Can non-defaulting assets be included in a portfolio that has been assessed for impairment?
  9. 9. Review of Assets Each and every period: Is there objective evidence of impairment? What type of evidence are we considering?
  10. 10. Review of Assets Each and every period: Is there objective evidence of impairment? What type of evidence are we considering? The difference between the IFRS approach and the US GAAP approach is that IFRS wants to reconsider when there is a change in the surrounding circumstances while the US GAAP model says a deal is a deal.
  11. 11. Review of Assets Each and every period: Is there objective evidence of impairment? What type of evidence are we considering? Cliff comment: Perhaps it should depend on the type of agreement EG: Credit line = times have changed model Loan = Deal has been made and it is up to the bank to assess the results and provide for changed circumstances
  12. 12. Possible Loss Events include: 1. Financial difficulty of the issuer or obligor What type of evidence are we considering? 2. Breach of contract – default on payments 3. A concession to the borrower 4. Probability of borrower BK 5. Disappearance of active market 6. Decrease in cash flow from a group of assets – EG: increase in ‘Minimum Pmts’ or Credit limits 7. National or local conditions that correlate with defaults – EG: regional property prices
  13. 13. Time-value of money This is the Risk-free rate And is usually tied to a published rate This rate may fluctuate out-of-sync with the instrument
  14. 14. Unintended consequences There are new risks to be dealt with - Mistakes (Staff need training) Judgment: - Fraud Opportunities (is this why the US us concerned?) Under-funding of External Auditors Inadequate supervision (Internal Control)
  15. 15. Impairment IFRS 9 requires an impairment allowance against the amortized cost of financial assets held at amortized cost or FV_OCI
  16. 16. Impairment IFRS 9 requires an impairment allowance against the amortized cost of financial assets held at amortized cost or FV_OCI The change in this allowance is reported in PoL
  17. 17. Impairment IFRS 9 requires an impairment allowance against the amortized cost of financial assets held at amortized cost or FV_OCI The change in this allowance is reported in PoL For most such assets, when the asset is acquired the impairment allowance is measured as PV of credit losses from defaults - projected over the next 12 months
  18. 18. Impairment IFRS 9 requires an impairment allowance against the amortized cost of financial assets held at amortized cost or FV_OCI The change in this allowance is reported in PoL For most such assets, when the asset is acquired the impairment allowance is measured as PV of credit losses from defaults - projected over the next 12 months If there is a significant increase in credit risk, the allowance is measured as the PV of all credit losses projected for the instrument over its full lifetime
  19. 19. Phase 2: Impairment (1) 2008 Financial crisis: the delayed recognition of credit losses on loans (and other financial instruments) was identified as a weakness in existing accounting standards As part of IFRS 9 the IASB has introduced a new, expected loss impairment model that will require more timely recognition of expected credit losses (ECL) IFRS 9 requires entities to account for ECL - from when financial instruments are first recognised and - it lowers the threshold for recognition of full lifetime expected losses
  20. 20. Impairment (2) IFRS 9 requires an impairment allowance against the amortized cost of financial assets held at amortized cost or FV_OCI During the financial crisis there was criticism that companies had been allowed to delay recognition of impairment Both the IASB and the FASB have developed an ECL model (they differ)
  21. 21. Impairment (3) When an asset is acquired an impairment allowance is - measured = PV of ECL from default events - projected over the next 12 months.
  22. 22. Impairment (3) Changes in this allowance are reported in PoL When an asset is acquired an impairment allowance is - measured = PV of ECL from default events - projected over the next 12 months.
  23. 23. Impairment (3) Changes in this allowance are reported in PoL When an asset is acquired an impairment allowance is - measured = PV of ECL from default events - projected over the next 12 months. This allowance = - the expected losses from defaults over the next 12 months - unless there is a significant increase in credit risk.
  24. 24. Impairment (4) If there is a significant increase in credit risk, the allowance is measured as the PV of all ECL projected for the instrument over its full lifetime
  25. 25. Impairment (4) If there is a significant increase in credit risk, the allowance is measured as the PV of all ECL projected for the instrument over its full lifetime If the credit risk recovers, the allowance can once again be limited to the ECL over the next 12 months
  26. 26. Impairment (IFRS vs FASB) Under both IFRS 9 and the FASB model there will be a loss assessed when assets are acquired to the extent of the ECL allowance
  27. 27. Impairment (IFRS vs FASB) Under both IFRS 9 and the FASB model there will be a loss assessed when assets are acquired to the extent of the ECL allowance Both = an accelerating recognition of impairment losses
  28. 28. Impairment (IFRS vs FASB) Under both IFRS 9 and the FASB model there will be a loss assessed when assets are acquired to the extent of the ECL allowance Both = an accelerating recognition of impairment losses FASB requires full lifetime recognition from the time the asset is acquired, referred to as the "current expected credit losses" or CECL model
  29. 29. Impairment (IFRS vs FASB) Under both IFRS 9 and the FASB model there will be a loss assessed when assets are acquired to the extent of the ECL allowance Both = an accelerating recognition of impairment losses FASB requires full lifetime recognition from the time the asset is acquired, referred to as the "current expected credit losses" or CECL model The ‘allowance’ loss will be smaller under the IFRS 9 model, due to the 12 month limit
  30. 30. PwC Impairment Estimating expected losses under FASB and IASB models 30 • Both the credit deterioration model and the CECL model focus on an expected value measurement for credit losses • Both models require credit loss estimates to be based on internally and externally available information considered relevant in making the estimate, including information about past events, current conditions, and reasonable and supportable forecasts • Both models require the estimate of credit losses to consider a scenario where a credit loss results and a scenario where no credit loss results. Entities are prohibited from estimating expected credit losses based solely on the most likely outcome • Estimates under both models should include consideration of the time value of money
  31. 31. PwC Impairment The FASB’s current expected credit loss (CECL) model 31 • After deciding not to move forward with the ‘three bucket’ model, the FASB staff has developed a revised model referred to as the ‘CECL’ model • Removes the ‘dual measurement’ approach of the IASB model and creates a single measurement of current expected credit losses, which reflects management’s best estimate of the future contractual cash flows that the entity does not expect to collect • Interest income generally recognized on the basis of contractual terms (with the exception of purchased credit impaired (PCI) assets), where the non-credit portion of the purchase discount/premium is recognized in income over the life of the asset • The CECL model requires interest income recognition to cease when it is no longer probable that the full amount of principal and interest payments will be collected
  32. 32. 2. Scope Welcome to the Dark Side
  33. 33. Scope - included • investments in debt instruments measured at amortized cost B4.1.10 • investments in debt instruments measured at fair value through other comprehensive income (FV_OCI) • all loan commitments not measured at FV_PoL • financial guarantee contracts to which IFRS 9 is applied and that are not accounted for at FV_PoL • lease receivables within the scope of IAS 17, Leases, and • trade receivables or contract assets within the scope of IFRS 15 that give rise to an unconditional right to consideration
  34. 34. Scope During the financial crisis, the delayed recognition of credit losses on loans (and other financial instruments) was identifed as a weakness in existing accounting standards. B4.1.10 As part of IFRS 9 the IASB has introduced a new, ECL model that will require more timely recognition of expected credit losses. The new Standard requires entities to account for expected credit losses from when financial instruments are first recognised and it lowers the threshold for recognition of full lifetime expected losses.
  35. 35. 3. Expected Credit Loss Model (ECL) Welcome to the Dark Side Let me tell you a story – once upon a time there was a standard called IAS39 You lend your neighbor $1,000 He pays on time and is an excellent person
  36. 36. ECL – example (1) Along comes IFRS 9 Your neighbor offers service to Oil Companies Oil prices slump Under IFRS 9 we have to recognize a risk = a credit quality event. We provide for an ECL even if your neighbor has not missed a payment
  37. 37. ECL - 3 stage model
  38. 38. Definition of buckets 1. 12mth ECL The triggering Default event will happen in next 12 mths
  39. 39. Definition of buckets 2. Lifetime ECL The default event will happen sometime within the life of the loan 1. 12mth ECL The triggering Default event will happen in next 12 mths
  40. 40. Definition of buckets 2. Lifetime ECL The default event will happen sometime within the life of the loan 1. 12mth ECL The triggering Default event will happen in next 12 mths Default events : 1st - What is a default? 2nd - Are there degrees of default? 3rd - What is the expected loss on this loan?
  41. 41. 4. Measurement of ECL (1) - Initial Because future macroeconomic outlooks are important to assess the creditworthiness of borrowers a "day 1" loss allowance needs to be recognized The amount of this allowance is based upon the probability of default during the coming 12 months, as well as the loss amount that would result This loss allowance is referred to as the 12-month expected credit loss (ECL)
  42. 42. 4. Measurement of ECL (2) – stage 2 If, at any time, the credit quality of the exposure has significantly deteriorated: the lifetime ECL (LT ECL) should be calculated instead of 12-month ECL.
  43. 43. 4. Measurement of ECL (3) – stage 3 If, at any time, the credit quality of the exposure becomes Non-performing Lifetime ECL is calculated as the PV of the loss due to a default that occurs over the entire remaining contractual maturity of the loan The ECL is increased to the Lifetime ECL level amount ECLs are probability-weighted (by the probability of default, or PDs).
  44. 44. Impairment IFRS 9 requires an impairment allowance against the amortized cost of financial assets held at amortized cost or FV_OCI The change in this allowance is reported in PoL For most such assets, when the asset is acquired the impairment allowance is measured as PV of credit losses from defaults - projected over the next 12 months If there is a significant increase in credit risk, the allowance is measured as the PV of all credit losses projected for the instrument over its full lifetime
  45. 45. Phase 2: Impairment (1) 2008 Financial crisis: the delayed recognition of credit losses on loans (and other financial instruments) was identified as a weakness in existing accounting standards
  46. 46. Phase 2: Impairment (1) 2008 Financial crisis: the delayed recognition of credit losses on loans (and other financial instruments) was identified as a weakness in existing accounting standards As part of IFRS 9 the IASB has introduced a new, expected loss impairment model that will require more timely recognition of expected credit losses (ECL)
  47. 47. Phase 2: Impairment (1) 2008 Financial crisis: the delayed recognition of credit losses on loans (and other financial instruments) was identified as a weakness in existing accounting standards As part of IFRS 9 the IASB has introduced a new, expected loss impairment model that will require more timely recognition of expected credit losses (ECL) IFRS 9 requires entities to account for ECL - from when financial instruments are first recognised and - it lowers the threshold for recognition of full lifetime expected losses
  48. 48. Impairment (2) IFRS 9 requires an impairment allowance against the amortized cost of financial assets held at amortized cost or FV_OCI
  49. 49. Impairment (2) IFRS 9 requires an impairment allowance against the amortized cost of financial assets held at amortized cost or FV_OCI During the financial crisis there was criticism that companies had been allowed to delay recognition of impairment
  50. 50. Impairment (2) IFRS 9 requires an impairment allowance against the amortized cost of financial assets held at amortized cost or FV_OCI During the financial crisis there was criticism that companies had been allowed to delay recognition of impairment Both the IASB and the FASB have developed an ECL model (they differ)
  51. 51. Impairment (3) When an asset is acquired an impairment allowance is - measured = PV of ECL from default events - projected over the next 12 months.
  52. 52. Impairment (3) Changes in this allowance are reported in PoL When an asset is acquired an impairment allowance is - measured = PV of ECL from default events - projected over the next 12 months.
  53. 53. Impairment (3) Changes in this allowance are reported in PoL When an asset is acquired an impairment allowance is - measured = PV of ECL from default events - projected over the next 12 months. This allowance = - the expected losses from defaults over the next 12 months - unless there is a significant increase in credit risk.
  54. 54. Impairment (4) If there is a significant increase in credit risk, the allowance is measured as the PV of all ECL projected for the instrument over its full lifetime
  55. 55. Impairment (4) If there is a significant increase in credit risk, the allowance is measured as the PV of all ECL projected for the instrument over its full lifetime If the credit risk recovers, the allowance can once again be limited to the ECL over the next 12 months
  56. 56. 5. Simplified Approach 1. Trade Receivables and Contract assets 2. That do not have a significant financing component 3. entity’s that do not have sophisticated credit risk systems
  57. 57. 5. Simplified Approach 1. Trade Receivables and Contract assets 2. That do not have a significant financing component 3. entity’s that do not have sophisticated credit risk systems These simplifications eliminate the need to calculate 12-month ECL and to assess when a significant increase in credit risk has occurred.
  58. 58. 5. Simplified Approach 1. Trade Receivables and Contract assets 2. That do not have a significant financing component 3. entity’s that do not have sophisticated credit risk systems These simplifications eliminate the need to calculate 12-month ECL and to assess when a significant increase in credit risk has occurred. Use only Lifetime ECL Model as a policy election
  59. 59. Purchase of Credit Impaired A financial asset is considered credit-impaired on purchase if there is evidence of impairment at initial recognition (EG: if it is acquired at a deep discount).
  60. 60. Purchase of Credit Impaired A financial asset is considered credit-impaired on purchase if there is evidence of impairment at initial recognition (EG: if it is acquired at a deep discount). Impairment is based on full lifetime ECL on initial recognition. However, lifetime ECL are included in the estimated cash flows when calculating the effective interest rate on initial recognition. Note: The effective interest rate for interest recognition throughout the life of the asset is a credit-adjusted effective interest rate. As a result, no loss allowance is recognized on initial recognition
  61. 61. Purchase of Credit Impaired A financial asset is considered credit-impaired on purchase if there is evidence of impairment at initial recognition (EG: if it is acquired at a deep discount). Impairment is based on full lifetime ECL on initial recognition. Any subsequent changes in lifetime ECL, + or – will be recognized immediately in PoL However, lifetime ECL are included in the estimated cash flows when calculating the effective interest rate on initial recognition. Note: The effective interest rate for interest recognition throughout the life of the asset is a credit-adjusted effective interest rate. As a result, no loss allowance is recognized on initial recognition
  62. 62. Low Risk Credit Impaired If credit risk is low at reporting date, you do not have to assess if increase in CR has occurred, IF: Operational scope exception
  63. 63. Low Risk Credit Impaired If credit risk is low at reporting date, you do not have to assess if increase in CR has occurred, IF: 1. has a low risk of default 3. the lender expects, in the longer term, that adverse changes in economic and business conditions might, but will not necessarily; reduce the ability of the borrower to fulfil its obligations Operational scope exception 2. the borrower is considered, in the short term, to have a strong capacity to meet its obligations
  64. 64. Low Risk Credit Impaired If credit risk is low at reporting date, you do not have to assess if increase in CR has occurred, IF: 1. has a low risk of default Collateral is omitted when considering 1 - 3 3. the lender expects, in the longer term, that adverse changes in economic and business conditions might, but will not necessarily; reduce the ability of the borrower to fulfil its obligations Operational scope exception 2. the borrower is considered, in the short term, to have a strong capacity to meet its obligations
  65. 65. Low Risk Credit Impaired If credit risk is low at reporting date, you do not have to assess if increase in CR has occurred, IF: 1. The borrower has a low risk of default Collateral is omitted when considering 1 - 3 3. the lender expects, in the longer term, that adverse changes in economic and business conditions might, but will not necessarily; reduce the ability of the borrower to fulfil its obligations Operational scope exception 2. the borrower is considered, in the short term, to have a strong capacity to meet its obligations This operational simplification will provide relief to entities especially financial institutions, such as insurers, who hold large portfolios of securities with high credit ratings
  66. 66. Impairment Flowchart
  67. 67. 6. Basel Basel is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk of the banking sector. ... Improve risk management and governance. Strengthen banks' transparency and disclosures
  68. 68. 6. Basel Basel is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk of the banking sector. ... Improve risk management and governance. Strengthen banks' transparency and disclosures Basel has been through a number of developments – we are now considering BASEL IV
  69. 69. IFRS & BASEL IFRS – IAS 39 Incurred Loss Model ILM Disclose losses incurred at BS date BASEL III Expected Loss Model ELM Adequate provision for losses IFRS – IFRS 9 Expected Loss Model ELM Adequate provision for losses
  70. 70. BASEL - Expected Loss What is the probability of debtor default? ECL=PD EAD x LGDx What is our exposure? How much loss? 1.3% $1m 15% $1,950 Customer type related Product & Amount Impact % Expected Monetary Value
  71. 71. 7. Recognition Impairment (FV_PoL) Best by an example discussion
  72. 72. Information to consider when measuring ECL The standard establishes that management should measure ECL’s over the remaining life of a financial instrument in a way that reflects: 1. an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes 2. the time value of money 3. reasonable and supportable information about: • past events, • current conditions and • reasonable and supportable forecasts of future events • economic conditions at the reporting date
  73. 73. Information to consider when measuring ECL The standard establishes that management should measure ECL’s over the remaining life of a financial instrument in a way that reflects: 1. an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes 2. the time value of money 3. reasonable and supportable information about: • past events, • current conditions and • reasonable and supportable forecasts of future events • economic conditions at the reporting date The degree of judgment that is required for the estimates depends on the availability of detailed information
  74. 74. Credit Risk Characteristics Examples of shared credit risk characteristics might include, (but are not limited to): a. the instrument type b. the credit risk ratings c. the collateral type d. the date of origination e. the remaining term to maturity f. the industry g. the geographical location of the borrower, and h. the value of collateral relative to the commitment if it has an impact on the probability of a default occurring (EG, non-recourse loans in some jurisdictions or loan-to-value ratios). Top down vs bottom up approach IFRS 9.B5.5.5
  75. 75. Recognising FV_OCI If there is a significant increase in credit risk, the allowance is measured as the PV of all ECL projected for the instrument over its full lifetime
  76. 76. Recognising FV_OCI If there is a significant increase in credit risk, the allowance is measured as the PV of all ECL projected for the instrument over its full lifetime If the credit risk recovers, the allowance can once again be limited to the ECL over the next 12 months
  77. 77. Example: FV_OCI Entity buys 5% 10yr bond at FV = $1,000 on Dec 12,2015 and wishes to use FV_OCI Asset Dr 1,000,000 Cash 1,000 Cr 2.01
  78. 78. Example: FV_OCI (2) On Dec 31, 2015 FV = $950. Entity determines increase in Credit Risk and 12mth ECL = $30 Asset PoL 2.01 OCI Total FV change = $50 offset by 12mthECL = $30 Dr 1,000
  79. 79. Example: FV_OCI (2) On Dec 31, 2015 FV = $950. Entity determines increase in Credit Risk and 12mth ECL = $30 Asset Dr 30 PoL50 Cr 2.01 OCI Dr 20 Total FV change = $50 offset by 12mthECL = $30 Dr 1,000
  80. 80. Example: FV_OCI (3) On Jan 1, 2016, sell for $950 cash Dr Cash 950 Cr Asset 950 Dr PoL 20 Cr OCI 20 Asset Dr 30 PoL50 Cr 2.01 OCI Dr 20 Total FV change = $50 offset by 12mthECL = $30 Dr 1,000 950 Cr
  81. 81. Example: FV_OCI (3) On Jan 1, 2016, sell for $950 cash Dr Cash 950 Cr Asset 950 Dr PoL 20 Cr OCI 20 Asset Dr 30 PoL50 Cr 2.01 OCI Dr 20 Dr 1,000 950 Cr Dr 20 20 Cr Dr 50
  82. 82. 8. Loss-rate approach
  83. 83. 9. Loss-rate approach Top-down is there for entities who do not have the individual information available Less sophisticated entities may use a Loss-rate approach [IFRS9.B5.5.12] Loss-rate – based on a developed loss statistic – but cautions that it will not be able to assess ECL_12Mth and ECL_Lifetime changes Re: Top down vs bottom up approach IFRS 9.B5.5.6
  84. 84. Presentation Present interest revenue in the statement of OCI as a separate line item
  85. 85. Presentation Present interest revenue in the statement of OCI as a separate line item Recognize ECL in the Statement of Financial Position as: • a loss allowance for financial assets measured at amortized cost and lease receivables; and • a provision (that is, a liability) for loan commitments and financial guarantee contracts
  86. 86. Presentation Present interest revenue in the statement of OCI as a separate line item Recognize ECL in the Statement of Financial Position as: • a loss allowance for financial assets measured at amortized cost and lease receivables; and • a provision (that is, a liability) for loan commitments and financial guarantee contracts Financial assets (that are mandatorily measured at FV_OCI, the accumulated impairment amount is not separately presented in the statement of financial position. However, an entity should disclose the loss allowance in the notes to the financial statements.
  87. 87. 9. Where the US Diverges
  88. 88. FASB CECL model Current Expected Loss Model After deciding not to move forward with the ‘3 bucket’ model, FASB developed - ‘CECL’ model
  89. 89. FASB CECL model Current Expected Loss Model After deciding not to move forward with the ‘3 bucket’ model, FASB developed - ‘CECL’ model Removes the ‘dual measurement’ approach of the IASB model and creates a single measurement of CECL = management’s best estimate of the future contractual cash flows that the entity does not expect to collect
  90. 90. FASB CECL model Current Expected Loss Model After deciding not to move forward with the ‘3 bucket’ model, FASB developed - ‘CECL’ model Interest income generally recognized on the basis of contractual terms (with the exception of purchased credit impaired (PCI) assets), where the non-credit portion of the purchase discount/premium is recognized in income over the life of the asset Removes the ‘dual measurement’ approach of the IASB model and creates a single measurement of CECL = management’s best estimate of the future contractual cash flows that the entity does not expect to collect
  91. 91. Estimating ECL - FASB and IASB models • Both the credit deterioration model and the CECL model focus on an expected value measurement for credit losses • Both models require credit loss estimates to be based on internally and externally available information considered relevant in making the estimate, including information about past events, current conditions, and reasonable and supportable forecasts • Both models require the estimate of credit losses to consider a scenario where a credit loss results and a scenario where no credit loss results. Entities are prohibited from estimating expected credit losses based solely on the most likely outcome • Estimates under both models should include the time value of money
  92. 92. US GAAP not converging In the beginning – Joint project 3 stage approach lacked support in US FASB developed a single measurement model Also US decided not to use a C & M model as IASB So IFRS 9 is NOT a converged standard
  93. 93. 10. Transition This standard will be very challenging to apply, in particular for financial institutions
  94. 94. 10. Transition This standard will be very challenging to apply, in particular for financial institutions Currently, most entities do not collect the amount of credit information required by the standard. Entities will need to significantly modify their current credit and information systems in order to gather the required information.
  95. 95. 10. Transition This standard will be very challenging to apply, in particular for financial institutions Currently, most entities do not collect the amount of credit information required by the standard. Entities will need to significantly modify their current credit and information systems in order to gather the required information. Management will need to build new models to determine both 12- month and lifetime ECL. This will require complex judgments (for example, definition of default, definition of low credit risk and behavioral life of revolving credit facilities). It is expected that the implementation process will require a significant amount of time before an entity will be in a position to comply with the requirements of the standard.
  96. 96. 10. IFRS Transition For Annual periods beginning after 2018 Jan 1 Can use the simplified approach initially (Lifetime ECL only) Approximations are tolerated
  97. 97. IS YOUR LIFE NOW CHANGED? The End
  98. 98. Questions?
  99. 99. 99 CliffB
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IFRS 9 Financial Instruments - Impairment Presentation, ifrs 09 impairment, impairment, Investment impairment, permanent impairment

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