IFRS 9 : Expected Credit Loss Model

 IFRS 9 : Expected Credit Loss Model : A Best Model For Provisioning For Impaired Assets In The Banks

In contrast to recognition of credit losses based on actual deterioration of financial assets under the extant “Incurred Loss Model”, IFRS 9 requires that credit losses on financial assets are measured and recognised using the 'expected credit loss (ECL) approach. ECLs are classified into (i) 12-month ECL and (ii) lifetime ECLs. 12 month ECLs are those that result from default events that are possible within 12 months after the reporting date. Lifetime ECLs are those that result from all possible default events over the expected life of a financial instrument. Under the IFRS 9, it is no longer necessary for a loss event to have occurred but instead an entity is required to account for ECLs on initial recognition of the financial asset & then separately account for changes in the ECL at each reporting date. Therefore, the impairment of financial assets is recognised in stages: Stage 1️⃣ [Performing] As soon as a financial instrument is originated or purchased, a 12-month ECL is recognised in profit or loss and a loss allowance is established (may be nil). For financial assets, interest revenue is calculated on the gross carrying amount (ie without deduction for ECLs). Stage 2️⃣ [ Under Performing ] At each reporting date, the ECL is remeasured: ➡️ If the credit risk has not increased significantly, continue to recognise a 12 month ECL. The calculation of interest revenue is the same as for Stage 1. ➡️ If the credit risk increases significantly and is not considered low, full lifetime ECLs are recognised in profit or loss. The calculation of interest revenue is the same as for Stage 1. Stage 3️⃣ [Non-Performing] If the credit risk of a financial asset increases to the point that it is considered credit-impaired, interest revenue is calculated based on the amortised cost. Financial assets in this stage will generally be assessed individually. Lifetime ECLs are recognised on these financial assets. 🟦 Assessment Of Significant Increase In Credit Risk The assessment of significant increases in credit risk can be performed on a collective basis, rather than on an individual basis, if the financial instruments share the same risk characteristics. However if any assets are deemed credit impaired they will generally be assessed on an individual basis. Financial assets with a low credit risk would not meet the lifetime ECL criterion. An entity does not recognise lifetime ECL for financial assets that are equivalent to 'investment grade', which means that the asset has a low risk of default. There is a rebuttable presumption that lifetime expected losses should be provided for if contractual cash flows are more than 30 days overdue. If the credit quality subsequently improves and the lifetime ECL criterion is no longer met, the credit loss reverts back to a 12-month ECL basis.